About 20 members of the faction, an armed offshoot of the ruling Fatah party, burst into the building on Manger Square on Tuesday.
The fighters then ordered all staff to leave and closed all the doors, witnesses and security sources said.
Witnesses added that a number of armed men also took up positions on the roof of the building.
The incident was another sign of growing turmoil within Palestinian President Mahmoud Abbas' Fatah faction ahead of a January parliamentary election.
Palestinian security forces, armed with automatic weapons, surrounded the municipal building.
Members of the Brigades who had been deployed at the entrance to the building said their colleagues had acted in protest at the Palestinian Authority's failure to provide financial assistance to 300 activists.
Eyes on Bethlehem
They wanted to draw the international community's attention to the issue at a time "when the eyes of the world are turned towards Bethlehem on the eve of Christmas," one Brigades member said about the birthplace of Jesus Christ.
The fighters left the city's hall peacefully, ending a one-hour standoff after receiving a promise from the mayor to address their demands for jobs and pay.
Abbas has consistently pledged, but so far failed, to tame the security chaos in the West Bank and Gaza Strip where armed men are often able to act with impunity, often in the name of resistance to Israel.
Tuesday's action revived memories of a five-week standoff between the Israeli army and a group of fighters who had taken over the Nativity church in 2002.