Christ believe the tiny piece of wood formed part of the crib that Jesus lay in after being born. Pope Francis ordered the return of the thumb-sized relic from Rome's Basilica of Santa Maria Maggiore as a gift, the BBC reported.
It was briefly put on display in Jerusalem before continuing its journey to Bethlehem to coincide with the start of Christmas celebrations there. Bethlehem is a popular place for Christian pilgrims from around the world, particularly at Christmas time.
Officials said it would now be kept in the Franciscan Church of St Catherine, next to the Church of the Nativity, where tradition says Jesus was born.
The Vatican has described the return of the relic as a gift from the Pope, Bethlehem's mayor Anton Salman told Palestinian news agency Wafa that its return followed a request from Palestinian President Mahmoud Abbas during a recent visit to the Vatican.
Its return coincided with the beginning of Advent, a four-week period leading up to Christmas.
Custodia Terrae Sanctae, the custodian of Catholic religious sites in the Holy Land, said the Patriarch of Jerusalem, St Sophronius, donated the relic to Pope Theodore I in the 7th Century.
The relic of the manger is not the first religious artefact to be returned by the Pope. Earlier this year, he gave some of the purported bone fragments of Saint Peter to the leader of the Eastern Orthodox Church. He later said the move was intended to bring the Orthodox and Catholic churches together.
Custodia Terrae Sanctae said the baby Jesus' crib relic had since been kept on display in Rome's Basilica of Santa Maria Maggiore, where a "very large number of pilgrims from all over the world" went each day to "venerate it". While most of it has remained in Rome, the return of the small fragment was widely celebrated by Christ in the region, who make up an estimated 1 per cent of the Palestinian population in the West Bank, Gaza and East Jerusalem.
Yisca Harani, an Israeli expert on Christianity described the relic's return as an "inversion of history" Israeli newspaper Haaretz.
"A thousand years ago, Rome was busy collecting relics from the East to build itself up as an alternative Jerusalem. Now, Rome is strong enough that it can return relics to Jerusalem and Bethlehem," she said.
( With inputs from IANS )