Most were local residents or Christian Arabs from neighboring Israel, with a sprinkling of foreign tourists.
"It hasn't really set in that I am here in Bethlehem where everything happened so many thousand years ago," said an overwhelmed Matt Lafontaine, a 21-year-old university student from Plymouth, Minnesota. "It's really exciting. It's just starting to set in. It's surreal."
In an annual tradition, Bethlehem's residents enacted Christmas rituals that seem out of place in the Middle East. Palestinian Scouts marched through the streets, some wearing kilts and pompom-topped berets, playing drums and bagpipes. They passed inflatable red-suited Santas, looking forlorn in the West Bank sunshine.
Other scenes of this Bethlehem Christmas, however, could be found nowhere else. To get to town, Latin Patriarch Michel Sabbah, the Roman Catholic Church's highest official in the Holy Land, rode in his motorcade through a huge steel gate in the Israeli separation barrier that separates Jerusalem from Bethlehem.
Israel says it built the barrier to prevent Palestinian suicide bombers from reaching Israeli population centers. Palestinians view the structure, which dips into parts of the West Bank, as a land grab.
The robed clergyman was led into Palestinian-controlled territory by a formal escort of five Israeli policemen mounted on horses. Two Israeli Border Police troops closed the gate behind him.
Sabbah, wearing a flowing gold and burgundy robe, led a procession into St. Catherine's Church, adjacent to the Church of the Nativity, the traditional birthplace of Jesus, for midnight Mass.
Hundreds of worshippers packed the cavernous hall for the service, as clergymen chanted in Latin amid the sound of bells and organ music. Palestinian President Mahmoud Abbas attended the ceremony, escorted by a large security detail to a front row seat.
In his homily, Sabbah offered a blessing to Abbas, appealed to Palestinians to halt their recent "fratricidal struggles" and called for an end to Israeli-Palestinian bloodshed.
"The conflict here has lasted too long," he said. "It is high time that the leaders who have our destinies in their hands in this land — specifically, the Palestinian and Israeli leaders as well as those of the international community — it is time for all of them to take new measures that will bring an end to the long phase of death in our history and lead us into a new phase in the history of this Holy Land."
Sabbah asked all political leaders and adversaries, including Israeli troops and those "who are classified as extremists and terrorists " to "examine their conscience" to end the bloodshed.
Earlier, Abbas expressed hope that his meeting with Israeli Prime Minister Ehud Olmert Saturday would lead to a peace breakthrough. He called the meeting "a good start."
"I congratulate our people, especially our Christian brothers, not only here but all around the world for Christmas and the New Year, God bless us," said Abbas, who is Muslim.
Bethlehem's tourist industry has been hit hard by the last six years of Israeli-Palestinian violence and by the barrier, which Israel began building in 2002, but also by internal Palestinian friction.