Pope Francis ordered the return of the thumb-sized relic from Rome's Basilica of Santa Maria Maggiore as a gift.
The relic had been in Rome since the 7th Century.
It was briefly put on display in Jerusalem before continuing its journey to Bethlehem to coincide with the start of Christmas celebrations there.
The relic, encased in an ornate stand, was welcomed to Bethlehem on Saturday by a procession of marching bands and taken to the Church of St Catherine, next to the Church of the Nativity where tradition says Jesus was born.
