The German pontiff told around 40,000 pilgrims gathered at St Peters' Square in Vatican City that they risk "spiritual barrenness" by becoming too enamoured with modern-day intellectual and technical achievements.
Pope Benedict also said signs of hope for peace in the Holy Land, Iraq and Lebanon "need to be confirmed by actions inspired by fairness and wisdom."
However fears of violence plagued tens of thousands who travelled to the birthplace of Jesus, Bethlehem in the West Bank, although shop owners and city officials said it was the busiest Christmas since the Palestinian uprising erupted five years ago.
The pope prayed for those who work with peace "and the prevention of fratricidal conflicts" in Africa, making special mention of the humanitarian crisis in Darfur, and called for protection of the rights of people.
However, his first Christmas message was dominated by his concern for the spiritual well-being of his flock of 1.2 billion Catholics, many of whom followed the annual event via a live television link-up to 68 countries.
"Men and women in our technological age risk becoming victims of their own intellectual and technical achievements, ending up in spiritual barrenness and emptiness of heart," he lamented.
"Wake up, oh men and women of the third millennium!" he said, urging people to open their hearts to the spiritual "light" of Christmas.
The 78-year-old pontiff appeared on the loggia of St Peter's basilica, from where his election as successor to the late Pope John Paul II was announced to the world on April 19.
Thousands turned out to hear him, despite bad weather, and many took shelter under a sea of colourful umbrellas in the square that was dominated by a giant Nativity scene and a 30-metre (100-foot) tree donated by Austria.
Benedict delighted the huge crowd when he launched into Christmas greetings to television viewers around the world in 32 languages, including Arabic, Hebrew, Chinese and even Finnish -- a tradition first begun by John Paul II, who usually stretched to more than 60 languages.
The pope bowed to his doctrinal roots however by rounding off the greetings in Latin, the traditional language of the Church.
Earlier, he lit a candle for world peace in the window of his apartment.
In Baghdad, minority Christians celebrated the midnight mass several hours before dusk because of a night curfew and the danger of being out late at night.
Around three percent of Iraq's population are Christian, but many have fled the country in recent years, fearing the growth of Islamic militancy.
In Indonesia, Christians were instructed to keep a low profile amid fears of a repeat of Christmas Eve bombings by extremists five years ago, which claimed 19 lives.
Millions of people celebrated Christmas in China as the holiday becomes increasingly popular, both commercially and religiously, despite government attempts to limit the spread of Christianity.