During a visit to Bethlehem, Pope Benedict XVI voiced support for Palestinian aspirations of an independent homeland and said he hoped the wall that Israel has erected in and around the West Bank would come down.
Palestinians gave an enthusiastic welcome to Pope Benedict
Speaking in Bethlehem after holding a mass in Manger Square, the pope pressed calls to remove the wall and watch towers that seal Bethlehem off from Jerusalem.
"Towering over us... is a stark reminder of the stalemate that relations between Israelis and Palestinians seem to have reached - the wall," the pope said as he stood in the shadow of Israel's separation wall in the Aida refugee camp, which houses refugees from Israel's creation in 1948.
The pope said it's "understandable that Palestinians feel frustrated," adding that "their legitimate aspirations for permanent homes, for an independent Palestinian state, remain unfulfilled."
The camp is home to around 5,000 refugees.
Palestinian children at the Aida refugee camp next to a poster of the pope
"I have seen, ... overshadowing much of Bethlehem, the wall that intrudes into your territories, separating neighbors and dividing families," the pope said in the town believed to be the birthplace of Jesus Christ.
"Although walls can be easily built, we all know that they do not last forever. They can be taken down."
Pope lends support to Palestinian statehood
Earlier, thousands greeted the pope's black limousine as he made his way to Manger Square where he said mass for about 5,000 people next to the Church of the Nativity that marks the spot where Christians believe Jesus was born to Mary in a stable.
One of the aims of the pope's visit is to attempt to preserve a shrinking Christian presence in the Middle East.
The Christian population of Bethlehem has decreased dramatically in recent years through emigration. Thousands of Christians left the town after a Palestinian uprising in 2000 and was met by an Israeli security clampdown and the start of construction of the barrier.
The pope acknowledged Israel's security concerns as well as Palestinian suffering, and urged people not to "resort to acts of violence or terrorism."
Pope Benedict XVI outside of the Church of the Nativity in Bethlehem
The pope said his heart went out to those caught up in the conflict in Gaza, adding that he was praying for an end to the Israeli embargo of the Gaza Strip.
Earlier, the pontiff told Palestinian President Mahmoud Abbas that he backed the creation of a Palestinian state.
"The Holy See supports the right of your people to a sovereign Palestinian homeland in the land of your forefathers, secure and at peace with your neighbors, within internationally recognized borders," he said.
The pope's comments are the Vatican's strongest and most symbolic public backing yet for an independent Palestinian state.
The two-state solution is supported by Abbas, Arab nations and Western powers. But the new Israeli prime minister, Benjamin Netanyahu, has declined so far to endorse it.
Visit dogged by controversy
The German-born pope's week-long trip to the Middle East, his first visit to the region, has not been without controversy.
On Tuesday, a row erupted over the pope's membership as a teenager of the Hitler Youth, as he paid a historic visit to holy sites in Jerusalem.
Vatican spokesman, Federico Lombardi, said the pontiff had "never, never, never" belonged to the organization, but later changed his version, saying that he had been a member but his membership was compulsory.
In his own 1997 memoirs, Pope Benedict had said he had been registered with the Hitler Youth while he was at a seminary.
The latest row comes on the heels of comments by some Israeli leaders complaining that the pope did not go far enough in offering emotion in remarks he made on Monday at the Yad Vashem memorial to the Jewish dead of the Holocaust.