Tuesday, 25 December 2007, 12:20 GMT
He denounced terrorism and violence that victimised children and women.
His address came as millions of Christians around the world celebrated the traditional day of Christ's birth.
Earlier, in the West Bank town of Bethlehem, the biblical site of Jesus's birth, thousands of worshippers celebrated midnight Mass.
'Joy, hope and peace'
The Pope spoke from a balcony in St Peter's Basilica in Rome, overlooking the square where thousands of people had gathered in the winter sunshine.
He said he hoped the "light of Christ" would "shine forth and bring consolation to those who live in the darkness of poverty, injustice and war".
In his Urbi et Orbi speech (Latin for 'To the City and the World') he said: "May this Christmas truly be for all people a day of joy, hope and peace."
He urged political leaders to have the "wisdom and courage to seek and find humane, just and lasting solutions" to "ethnic, religious and political tensions... [which are] destroying the internal fabric of many countries and embittering international relations".
The address was broadcast live on television to dozens of countries and was followed by greetings in about 60 languages.
Abbas attends
In the Pope's midnight Mass at the basilica, he urged people to find time for God and the needy.
In front of St Peter's Basilica, a new floodlit Nativity scene was officially unveiled.
This year, the larger-than-life-size statues of the baby Jesus and his family have been placed in a Nativity scene set not in a Bethlehem stable but in a room in Joseph's house in Nazareth.
Vatican officials say the change was made to illustrate the notion that Jesus was born everywhere, not just in Bethlehem.
Palestinian Authority President Mahmoud Abbas, a Muslim, joined the midnight Mass in Bethlehem and emphasised that not only Christians were celebrating the festival.
"The new year, God willing, will be a year of security and economic stability," he said.
"We pray next year will be the year of independence for the Palestinian people," he added.
Latin Patriarch Michel Sabbah, the Catholic leader in the Holy Land, called for peace in the Middle East as he led the Mass.
"This land belongs to God. It must not be for some a land of life and for others a land of occupation and a political prison," he said in a sermon delivered in his native Arabic.
Security fears
Local officials in Bethlehem say double the number of pilgrims have visited this year compared to last.
Fears about security and Israel's West Bank barrier - an imposing eight-metre (24ft) concrete wall separating the town from Jerusalem - have discouraged potential visitors in recent years.
During the second Palestinian uprising, which started in September 2000, tourism collapsed.
But with the relative stability of the last two years, tourists and pilgrims are returning to the town in larger numbers.
But the BBC's Bethany Bell says there are still far fewer tourists than there used to be before the uprising and that many of those celebrating outside the Church of the Nativity were local people.
There was still a heavy police presence, and before worshippers arrived bomb squads swept cars and buildings for explosives.
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