Speaking via satellite, Hizbullah Secretary General Hassan Nasrallah told the crowd "we found in our enemy nothing but concern and fear of Mugniyah's spirit, blood, revenge, way, and pledge.
"We are celebrating 40 days to the death of the martyr commander. These are festive days for Muslims and Christians," he said.
"Can Israel disappear? A thousand times, yes."
The Hizbullah leader charged that people should be free to question the Holocaust.
"Why is it that when it comes to the Zionists everyone is silent?" Nasrallah said. "When a great philosopher arrives and raises questions about the Holocaust, he is being judged. We condemn that."
"We see unprecedented Zionist and American infiltration of the media. They want to undermine our nation's consciousness. They want the end result to be our surrender," he said.
Prior to the event, held at a mosque in the Shiite Dahiya neighborhood, a Hizbullah stronghold, the terror group called on its followers to attend the "rally of loyalty to the blood of the fighter."
Earlier Monday, Defense Minister Ehud Barak said that Hizbullah's threats in the wake of Mugniyah's killing must not be taken lightly
Speaking during a visit to a West Bank crossing in southern Mount Hebron, Barak said Israel must "keep its eyes open." Following Mugniyah's assassination, Hizbullah leaders blamed Israel for the killing.