Reverend Michel Sabbah made the plea during prayers at the annual Christmas mass in Bethlehem on Saturday.
"Our situation is a situation of conflict and of violence, of insecurity and of fear, of military occupation, of the separation barrier, of prison towns, of humiliations," Sabbah told a congregation of several thousand at the Church of the Nativity.
"We pray that all walls fall down, those around Bethlehem and the other Palestinian towns, and the walls of hatred in our hearts.
"We say that it has lasted too long. It is time to conquer the violence in the souls and in the hearts of individuals, of leaders," he said.
Sabbah welcomed the fact that for the first time in four years Israel had allowed the Palestinian leadership, including Palestinian Liberation Organisation chairman Mahmud Abbas, to attend.
Before his death last month, Palestinian leader Yasir Arafat was a regular guest at midnight mass after his return to the Palestinian territories in 1994.
He was then confined by Israel to his offices in Ram Allah from early December 2001.
"You wanted to continue in the tradition started by President Arafat, recently departed for eternity, and to be present with us on this holy night," Sabbah said.
"Our situation is a situation of conflict and of violence, of insecurity and of fear, of military occupation, of the separation barrier, of prison towns, of humiliations"
Abbas is the firm favourite to succeed Arafat as president of the Palestinian Authority in elections to be held on 9 January.
By their attendance the leadership showed its commitment, as Arafat had before, to the "Christian presence among the Palestinian people", he said.
Now they had the responsibility of the people's "unity, its march towards justice and peace, and for maintaining order", he added.