Christmas celebrations have been held at the Church of Nativity in the Palestinian town of Bethlehem, the historic birthplace of Jesus Christ.
Palestinians were able to freely visit Bethlehem, Israeli forces say
For the first time in three years, Israel allowed Palestinian political leaders to attend the midnight sermon, where appeals for peace were made.
Veteran leader Yasser Arafat, who died in November, had been barred from the event over his alleged terror links.
Bethlehem locals said Christmas tourism had yet to return to earlier peaks.
Despite the air of hope, the Palestinians were mostly left to themselves for Christmas, without the tourists they need, says the BBC's James Reynolds in Bethlehem.
Palestinian presidential candidate Mahmoud Abbas and the interim chairman of the Palestinian Authority, Rawhi Fattuh, attended midnight Mass at the Church of the Nativity in Manger Square in Bethlehem.
Palestinian head Mahmoud Abbas joined worshippers in Bethlehem
In his sermon, Latin patriarch Michel Sabbah urged Israelis and Palestinians to "conquer the evil of violence" and work towards a new society in which "no one controls the other, no one is occupied by the other, no one causes insecurity for the other, no one takes liberty from the other".
Earlier in the day, he led a procession of some 1,000 Christians through Bethlehem to the accompaniment of a Palestinian band.
A giant portrait of Arafat looked down on Manger Square, as Palestinians turned out to greet Mr Abbas, the favourite to succeed him in presidential elections in January.
Vanunu turned back
By late Friday night, reports say, much of Manger Square was deserted, with only a few locals braving driving rain to stay outside.
Vanunu (right) is led away by Israeli police after his detention
Israeli forces eased restrictions imposed by their network of checkpoints and barriers, allowing a reported 5,000 Palestinians to visit Bethlehem for Christmas.
However, Israeli former nuclear technician Mordechai Vanunu was stopped as he tried to enter Bethlehem in defiance of a travel ban.
Vanunu, a Christian convert, had wanted to pray at the Church of the Nativity.
After spending 18 years in jail for disclosing details of Israel's nuclear weapons programme, he was released in April on condition that he did not travel outside Israel's borders or speak to the media.
Police released Vanunu on Saturday.