"It was all in good humour and Prince William clapped as loudly as the rest of the guests when he finished."
Harry's best man's speech also drew a tear from the bride.
"Harry said he loved having a 'sister' and that he cherished Kate as they have become so close," a guest said.
"He also said how much his mum would have been proud of them both. It was a great speech and the fez just made it. It was so Harry.
"It was just the sort of down-to-earth larking about the brothers are known for."
Made famous by comedian Tommy Cooper, the fez is typically a red felt hat with a long black tassel, a traditional Turkish headdress.
The brothers' grandfather, Prince Philip, also got a mention from Harry, as having been "dwarfed" by Catherine in her 7.6-centimetre heels, the Sunday Express reported.
The Queen and Prince Philip did not attend the evening reception, choosing to leave the palace after a luncheon gathering.
It meant they missed hearing a witty speech from father-of-the-bride Michael Middleton.
"I knew things were getting serious when I found a helicopter in my garden. I thought, 'Gosh, he must like my daughter'," Mr Middleton said of the newlyweds' courtship, according to the News of the World.
The palace party, at which guests were served Aberdeen Angus beef fillet and Welsh lamb as part of Swiss chef Anton Mosimann's carefully considered banquet, kicked on to about 3am.
"All the speeches were very good but Harry's was excellent, very funny indeed. There was a lot of mickey-taking," the Express source said.
A reception guest told The Mail on Sunday newspaper that Harry's speech included a high-pitched impersonation of Catherine calling William "Billy", and of his brother calling her "baby".
"William didn't have a romantic bone in his body before he met Kate, so I knew it was serious when William suddenly started cooing down the phone at Kate," Harry said.
The newlyweds farewelled their guests after the final song - The Beatles' She Loves You - before being driven away in a vintage convertible Fiat 500, just around the corner to their quarters, The Sunday Telegraph reports.
Some guests continued the celebrations and an after-party was held at the nearby Goring Hotel, where the Middleton family were staying.
William, 28, and Catherine, 29, left the palace by helicopter yesterday, bound for a secret UK destination where they will spend the next few days.
The couple have announced they will not honeymoon immediately, with William instead returning to work as a search-and-rescue helicopter pilot this week.