Pope is celebrating the traditional Christmas Mass, despite being knocked down by a woman at the start of the service in St Peter's Basilica.
The woman - who is said to be mentally unstable - jumped the security barriers as Benedict XVI 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.
Thousands of pilgrims have also gathered in Bethlehem to celebrate Christmas mass.
Woman arrested
The security incident involving the woman at St Peter's Basilica lasted only a few seconds.
The Pope had to be helped up by the master of ceremonies at his side, the BBC's David Willey in Rome says.
However, he quickly recovered his poise and passed into the basilica preceded by senior Vatican cardinals, our correspondent says.
Benedict then delivered the Christmas homily in a firm voice.
The woman who pushed the Pope also knocked down Cardinal Roger Etchegaray, who was taken to hospital for a check-up, Vatican spokesman Ciro Bedettini said.
The woman - whose name was not immediately known - was later arrested by police.
The Vatican said earlier that 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.
"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.
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Woman causes pope to fall at start of Christmas mass
(AFP) – 51 minutes ago
VATICAN CITY — A woman pushing against a barrier caused Pope Benedict XVI to fall on Thursday as he entered St Peter's Basilica to celebrate Christmas mass, the Vatican spokesman said.
The woman was "apparently unbalanced," Father Federico Lombardi told AFP.
The 82-year-old pontiff quickly recovered and went on to conduct the mass without assistance, but French Cardinal Roger Etchegaray fell ill in the crush and was given first aid, Lombardi said.
In gold and white vestments and mitre, the pope bore a gold cross in a solemn procession to the altar as the mass began two hours early, at 10:00 pm (2100 GMT) instead of the traditional midnight hour due to his advanced age.
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