Duncan won the title at the Ayfon circuit in Turkey earlier this month.
A cheering crowd of family members, school pupils and members of the wider community marched through the grounds of Duncan's old school, East Otago High School, waving signs and balloons to celebrate her victory.
District Mayor Gary Kircher said it was Palmerston's first civic parade since 1954, when the Queen and Duke of Edinburgh visited.
Mr Kircher praised her talent and perseverance.
"Without both, she wouldn't have got where she is today."
Duncan (23) had a string of bad luck before her win this year - including an injury at the German Grand Prix in 2016, sustained in a collision with a photographer.
"Continue to chase your dreams," she said yesterday.
"When I was growing up I wanted to be a world champion and I went through some tough times to get there and a lot of doubtful moments as well."
She was interested in motocross since she was a 6-year-old at Palmerston Primary School.
"I spent a lot of time riding and growing up with the kids that come to this school and it's cool to give back."
About 250 people attended the parade, including pupils from Palmerston Primary School, her sister, year 10 pupil Amy Turner (14) and members of Duncan's wider family, wearing Duncan #1 T-shirts.
"I couldn't ask for a more supportive family ... It's cool to have people like that behind you, win or lose, those guys are always there for me."
Duncan, who now lives in Dunedin, left school at the end of year 11.
East Otago principal Marcus Cooper said it appeared Duncan had made the right decision to leave early, but he was delighted to welcome her back.
"It's good to see the whole community right behind her."
The North Otago Highland Pipe Band performed during the parade, and Freddie Mercury impersonators Kelvin Cummings and Steve Larkins, performed We Are the Champions and We Will Rock You in the DG Murray Hall at the school.
Pupils also performed a haka in Duncan's honour.
The last New Zealand woman to win at world level in the sport was Katherine Oberlin-Brown (nee Prumm), who won the Women's Motocross World Cup in 2006 and 2007.
