Leo, the first US pope, said the story of Jesus being born in a stable showed that God had "pitched his fragile tent" among the people of the world.
"How, then, can we not think of the tents in Gaza, exposed for weeks to rain, wind and cold?" he asked.
Leo, celebrating his first Christmas after being elected in May by the world's cardinals to succeed the late Pope Francis, has a more quiet, diplomatic style than his predecessor and usually refrains from making political references in sermons.
But the new Pope has also lamented the conditions for Palestinians in Gaza several times recently and told journalists last month that the only solution in the decades-long conflict between Israel and the Palestinian people must include a Palestinian state.
Israel and Hamas agreed to a ceasefire in October after two years of intense bombardment and military operations, but humanitarian agencies say there is still too little aid getting into Gaza, where nearly the entire population is homeless.
In Thursday's service with thousands in St Peter's Basilica, Leo also lamented conditions for the homeless across the globe and the destruction caused by the wars roiling the world.
"Fragile is the flesh of defenceless populations, tried by so many wars, ongoing or concluded, leaving behind rubble and open wounds," said the Pope.
"Fragile are the minds and lives of young people forced to take up arms, who on the front lines feel the senselessness of what is asked of them and the falsehoods that fill the pompous speeches of those who send them to their deaths," he said.
Later on Thursday the pope will deliver a twice-yearly "Urbi et Orbi" (to the city and the world) message and blessing, which usually addresses global conflicts.
