The gestures has been seen as a sign of the changed attitudes since the death of Palestinian president Yasir Arafat.
After Abbas' arrival in the late afternoon accompanied by Rawhi Fattuh, the interim president of the Palestinian Authority said prayers in the Umar Ibn al-Khattab mosque opposite the Church of the Nativity.
Most residents were holding their breath that this Christmas season would be peaceful after four years of repressive Israeli policies in the wake of al-Aqsa Intifada which have all but killed off Bethlehem's fledgling tourist industry.
Israeli travel restrictions and the West Bank separation barrier have turned the celebrated birthplace of Jesus Christ into a ghost town for much of the year.
Christmas brings momentary relief to those suffering financially from the drop in tourism. Christians flock from nearby villages joining pilgrims from afar to celebrate the birth of Jesus in his hometown.
In the hours leading up to the big event, the traditional Christmas Eve mass, buses continued to flow into town with numbers looking to far exceed the 2000 to 3000 that made the trip in 2003.
Several thousands were already in place earlier on Friday to greet the Latin Patriarch of Jerusalem, Michel Sabbah.
Organisers had hoped for a much
larger attendance this year
He was due to give the sermon at a midnight mass at the Church of the Nativity.
Opposite the church, on the other side of Manger Square, flashing letters on the town hall spelt out in green neon Merry Christmas next to a large poster of a smiling and waving Arafat.
The late Palestinian leader was a regular guest at midnight mass after his return to the Palestinian territories in 1994, but was confined by Israel to his offices in Ram Allah from early December 2001.
Abbas is the firm favourite to succeed Arafat as president of the Palestinian Authority in elections to be held on 9 January.
"It is time for us to have a normal life like everybody else and we pray to God that he will make it easier for us," Joseph, 38, said as he stood at the entrance to his falafel shop.
Muslims perform Friday prayers
at the mosque in Manger Square
Joseph, a Palestinian Christian, blamed the Israelis for strangling the local economy with army checkpoints and the West Bank barrier, which the Jewish state maintains is necessary for security.
"The Israeli troops have to remove all these barriers and sanctions and make it easier for people to come here and enjoy the festivities and meet up with their friends and their families," he said.
Behind him several people in traditional Muslim clothing were mixing in with Christians wearing red Santa Claus hats as Christmas songs blared out from a stage in Manger Square.
Meanwhile, Israeli police detained nuclear whistleblower Mordechai Vanunu as he headed to the Christmas Eve mass in Bethlehem, a spokesman said.
The Israeli nuclear whistleblower
converted to Christianity in jail
"We arrested him when he travelled to Bethlehem despite the restrictions imposed on him," spokesman Shmuel Ben Ruby said. "He had with him a Father Christmas hat."
Vanunu, 50, converted to Christianity during 18 years' imprisonment imposed after he leaked details of Israel's secret nuclear arsenal to a British weekly newspaper.
Since his release last April, he has spent most of his time at Jerusalem's St George's Anglican cathedral.