Tourists and locals gathered in Manger Square to ask God to bring peace to the region.
It's after this summer's war in Gaza that seen thousands killed.
The Christmas tree's lights, in what's thought to be the birth place of Jesus Christ, were turned on by Vera Baboon.
Before lighting up the 15-metre high tree she said: "The message of Bethlehem is specifically in this year that we have the solidarity, we urge all the people through our message, that we need that solidarity because we only need on this Christmas- justice."
The event was attended by Palestinian Authority Prime Minister, Rami Hamdallah.
Lena from Bethlehem said Christmas is a special time for them: "We here in Bethlehem, we spread peace and hope for everyone, it's a special place.
"I wish everyone can come and celebrate Christmas here."
Nouen from Bethlehem said Christmas is very special to the Holy Land: "It has a very special flavour here in Palestine because it's a land of peace.
"You see all the people from all the religions, either Muslims or Christians, live together happily in peace."