JERUSALEM, July 7 (Reuters) - Israel will begin exhuming bodies of Hezbollah fighters on Monday ahead of a planned swap with the Lebanese guerrilla group, which is holding two soldiers, an Israeli military spokesman said.

Hezbollah captured army reservists Ehud Goldwasser and Eldad Regev in a July 2006 border ambush, triggering a 34-day war.

A U.N.-appointed German mediator has been handling the swap deal under which Israel would recover the soldiers in exchange for releasing five Lebanese prisoners and the remains of eight Hezbollah fighters and 200 slain Arab infiltrators.

Under the deal expected to take place this month, Israel would also release an undisclosed number of Palestinian prisoners. The two Israeli soldiers are believed dead but Hezbollah has refused to give information about their condition.

The Lebanese prisoners include Samir Qantar, the most prominent held by Israel. He is serving a life sentence for killing a policeman as well as a man and his 4-year-old daughter during a 1979 raid on the northern coastal town of Nahariya.

The policeman's family planned to petition Israel's Supreme Court to block Qantar's release, the policeman's brother, Yoram Shahar, told Israel Radio. In the past, the court has rejected such appeals.

"We are in a country surrounded by foes and should not give in to terror groups," Shahar said. (Writing by Joseph Nasr; Editing by Giles Elgood)

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