The Catholic leader, nearing the end of his eight-day tour of the Middle East, also attended a reception given by Nazareth's mayor and was to meet with Israeli Prime Minister Binyamin Netanyahu, CNN reported.
The pontiff urged Catholics and Muslims in the area to set aside differences.
"Sadly, as the world knows, Nazareth has experienced tensions in recent years which have harmed relations between its Christian and Muslim communities," Benedict said during his homily. "I urge people of good will in both communities to repair the damage that has been done, and .... to work to build bridges and find the way to a peaceful coexistence."
Tension has risen during the past 10 years over the planned construction of a mosque near the Church of Annunciation, the site where Catholics believe the archangel Gabriel told Mary she would be the mother of Jesus.
During a speech in the West Bank Wednesday, Benedict urged Israelis and Palestinians to work toward reconciliation in the Middle East.
Benedict also was to attend a meeting of about 2,000 Catholic leaders in Galilee, the region in northern Israel where Jesus conducted his public ministry as recorded in the first three gospels of the New Testament.