The festivities capped the most peaceful year since the outbreak of Israeli-Palestinian fighting in September 2000. But Israel's imposing separation barrier at the entrance to town dampened the Christmas spirit and provided a stark reminder of the unresolved conflict.
The gray concrete wall, which Israel erected to keep attackers out of its cities, divides Bethlehem and blocks access to neighboring Jerusalem. The 25-foot-high slabs drew as much attention Saturday as the Church of the Nativity and the grotto where tradition says Jesus was born.
About 30,000 people were expected to visit Bethlehem over Christmas — 10,000 more than last year — but still very different from the 1990s, when 150,000 people would visit during the holiday. By early evening, 7,000 tourists had arrived, Israeli officials said, despite stinging cold winds and pouring rain.
At the Vatican, pilgrims and tourists arrived in St. Peter's Square for. Benedict lit a candle in his studio window overlooking the square, keeping up the tradition of his predecessor, Pope John Paul II, by delivering a silent Christmas Eve blessing to the faithful below.
Spirits in Bethlehem were buoyed this year by Israel's summer withdrawal from the Gaza Strip and a sharp drop in violence. Forecasts of a rare white Christmas added to the excitement.
Throughout the day, choirs, marching bands and bagpipe players entertained the crowds. Several thousand people packed Manger Square — the large, stone-paved courtyard near the Church of the Nativity — as a procession led by Latin Patriarch Michel Sabbah entered Bethlehem. It headed for the church, where the top Roman Catholic envoy in the Holy Land was to celebrate Midnight Mass.
"It's awesome here. It is very emotional to come here and see the procession with the thousands of pilgrims who came from all around the world," said Edwina Webster, 53, of Hereford, England.
Bethlehem officials decorated Manger Square with Christmas lights, bells and Palestinian flags. People wandered around wearing Santa Claus hats, holding umbrellas against the rain and trying to keep up their holiday cheer.
Security was heavy days after Palestinian gunmen briefly took over City Hall to demand jobs, but there were no reports of trouble.
Restaurant, shop and hotel owners happily counted their money as visitors packed their establishments for the first time in years.
Locals estimated at least a 20 percent increase in tourists this year.
Palestinian leader Mahmoud Abbas arrived in town late Saturday to join the celebrations and attend midnight mass.
In a televised speech, Abbas said the Palestinians "are seeking a bridge to peace instead of Israeli walls."
"Unfortunately, Israel is continuing with its destructive policy ... (and) transforming our land into a big jail," he added.
Israeli Prime Minister Ariel Sharon called local Christian leaders on Saturday to wish them a merry Christmas, saying he hopes the new year will bring Israelis and Palestinians peace and security.
"We all need it and I intend to make every effort to reach it," he said in a statement.
The separation barrier prevented tourists from walking into town on the biblical-era route likely used by Jesus and Mary. Instead, they entered through an Israeli checkpoint.
"The wall has got to go. It's a wall of shame. Jesus is a uniter not a divider," said James Elsman, a 69-year-old lawyer from Detroit, a placard saying "Trust Jesus" draped over his shoulders.
Israel eased restrictions at the main checkpoint, decorating the military structure with posters signed by the Tourism Ministry reading "Peace be upon you" and "Visit Bethlehem and Jerusalem and engage for peace."
Driving through the checkpoint, Sabbah said he hoped it would remain open throughout the year so pilgrims could freely cross into Bethlehem from Jerusalem, the sister city just north of Jesus' birthplace.
"Nobody needs checkpoints in the Holy Land. This is the Holy Land and it should be treated as a holy area," Sabbah said.
Maha Sakka, who runs a heritage center in Bethlehem, said residents make the best of a bad situation, and have learned to live with the checkpoints and barrier.
"Now we have a frontier on the northern edge of Bethlehem," Sakka said. "We fear it, but it has become a reality."