The Pope is celebrating the traditional Christmas Eve Mass, despite being knocked down by a woman at the start of the service in St Peter's Basilica.
The woman - who is believed to be mentally unstable - jumped the security barriers as the Pope entered the basilica, causing the pontiff to fall.
The Pope appeared to be unhurt and recovered to lead the mass.
The midnight service started two hours early because officials do not want the 82-year-old pontiff to get tired.
The Vatican spokesman said the decision to move the midnight Mass to 2200 (2100 GMT) was "to make Christmas a little less tiring for the Pope, who has many engagements".
Pope Benedict XVI earlier appeared briefly at nightfall at the window of his studio to light a candle in a sign of peace.
Tourism boom
In Bethlehem, festivities began with a traditional boy scout band and were due to end with a midnight mass in St Catherine's Church, next to the Church of the Nativity.
The top Roman Catholic cleric in the Holy Land led the annual procession from Jerusalem to Bethlehem.
Latin Patriarch Foud Twal said the region sought peace above all else.
Patriarch arrives in Bethlehem
"The wish that we most want, we most hope for, is not coming. We want peace," he said after he and his convoy of cars entered the Palestinian territory, having passed through Israel's heavily-guarded separation barrier.
"We want freedom of movement, we don't want walls. We don't want separation fences," he added.
In Bethlehem, the midnight mass is taking place next to the church built over the stall where Mary is said to have given birth to Jesus.
Some 300 Christians over the age of 35 from the Gaza Strip were given permission by the Israeli military to leave the territory and come to Bethlehem for 24 hours to celebrate Christmas.
A total of 15,000 tourists are expected in the town during this period, in a year that has seen a record number of visitors - some 1.6 million.
One of the tourists who had crossed the planet to spend Christmas in Bethlehem was 27-year-old Juan Cruz, of Mexico.
"This is the place where God gave us his son, so it is very special for me to be here, for me and my whole community," he told AFP news agency.
Yet the tourism boom has failed to bring money with it as most of the tourists visit the town just for the day, staying in hotels in Israel.
"Only 5% of the money stays on the Palestinian side," Palestinian Tourism Minister Khulud Duaibess said.