For those who couldn't fit into the cavernous Bethlehem church, a loudspeaker outside broadcast the Christmas day service to hundreds of faithful in the square.
Their Palestinian hosts, who welcome this holiday as the high point of their city's year, were especially joyous this season, proud of the United Nations' recognition of an independent state of Palestine just last month.
"From this holy place, I invite politicians and men of good will to work with determination for peace and reconciliation that encompasses Palestine and Israel in the midst of all the suffering in the Middle East," said the top Roman Catholic cleric in the Holy Land, Latin Patriarch Fouad Twal in his annual address.
Back at the Vatican, Benedict offered encouragement to countries after the Arab spring of democracy protests. He had a special word for Egypt, "blessed by the childhood of Jesus."
Without citing the tumultuous politics and clashes in the region, he urged the North African region to build societies "founded on justice and respect for the dignity of every person."
Benedict prayed for the return of peace in Mali and harmony in Nigeria, where, he recalled "savage acts of terrorism continue to reap victims, particularly among Christians."
The Vatican for decades has been worried about the well-being of its flock in China, who are loyal to the pope in defiance of the communist's government support of an officially sponsored church, and relations between Beijing and the Holy See are often tense.
Speaking about China's newly installed regime leaders, Benedict expressed hope that "they will esteem the contribution of the religions, in respect for each other, in such a way that they can help to build a fraternal society for the benefit of that noble people and of the whole world."