Thousands of pilgrims and dignitaries crowded into Bethlehem's Church of the Nativity for a Christmas Mass, where Latin Patriarch Fuad al-Tuwal urged visitors to return home bearing a message of peace for the Holy Land, Reuters reported.
Entertaining crowds outside, bagpipers played carols and whirling dervishes danced, unfurling giant white skirts embroidered with the word peace in various languages.
Some 15,000 visitors packed into the stone flagged square opposite the small Door of Humility where pilgrims stoop to enter the multi-denominational church, built above the spot where Christians believe Jesus was born.
While much of North America and Europe were gripped in winter's icy embrace, visitors to Bethlehem were buying chilled fruit juice in Manger Square and stripping off sweaters in the mild weather.
"It's about 20 degrees (68 Fahrenheit) and it's a little hard to get that Christmas feeling I'm used to having," said Phillip Well, 22, from Germany.
Some tourists were bemused by the scene.
"I'm not used to seeing marching bands and scout troops do the Christmas festivities, but it's entertaining," said 40-year-old Vijey Raghavan, of San Francisco, California.
Inside the church at midnight mass, monks kept the celebrations traditional with Christmas hymns and al-Tuwal delivered a special Christmas message in six different languages, including Arabic.
Likening modern-day pilgrims to the shepherds who harkened the angel's message of Jesus' birth, al-Tuwal extended blessings of reconciliation and hope to families worldwide.
"You can take back with you the desire for peace and work for peace -- peace in the Holy Land where the prince of peace was born. And peace to all the world for men and women of goodwill," he said.
Tourism in Bethlehem has picked up in the past few years, after collapsing during the Palestinian intifada, or uprising, which erupted in 2000. Hotels expect a 60 to 70 percent rise in business this year.
Still, many locals say development is hindered by elaborate security arrangements Israel has put in place to keep Palestinian attackers out, including an eight meter (25 foot) high wall between Bethlehem and neighboring Jerusalem.
Visitors and local people cannot escape the sight of the wall but they were not allowing it to dampen the Christmas spirit. "It's safe, it's warm, it's a happy time. It's good for visitors to see the good things too," said 16 year-old Bethlehem resident Reem Mohammad.