Pope Francis on Sunday lit the Christmas tree and Nativity scene at the Basilica of St Francis in Assisi, which was built within a boat used by migrants to travel across the Mediterranean last year.
The ceremony was attended by more than 30 refugees, while Francis took part remotely from the Vatican.
"Watching that boat... Jesus is always with us, even in difficult times," he said, according to Vatican Radio.
"How many brothers and sisters have drowned at sea! They are with the Lord now. But He came to give us hope, and we must take this hope. He came to tell us that He is stronger than death, that He is greater than any evil. He came to tell us he is merciful, all mercy; and this Christmas I invite you to open your hearts to mercy and forgiveness. But it is not easy to forgive these massacres. It's not easy."
Francis thanked the Italian Coastguard for their work rescuing refugees stranded at sea, saying they were "the instrument of hope that brings us Jesus. You, among us, you have been sowers of hope."
Speaking directly to refugees, he added: "I say a word, that of the prophet: Raise your head, the Lord is near. And with him is strength, salvation, hope. The heart, perhaps, [is] sorrowful, but the head [is] high in the hope of the Lord."
More than 900,000 refugees and migrants have crossed the Mediterranean into Europe so far in 2015, many of them fleeing war and persecution in the Middle East, and Francis has repeatedly called for a compassionate response.
In a statement released ahead of the 2016 World Day for Migrants and Refugees, which will be celebrated by most countries on January 17, the pontiff challenged the international community to welcome those in need.
Alluding to Jesus' call to serve the poor in Matthew 25, the Pope said it is vital that we treat refugees with the dignity they deserve. "At the heart of the gospel of mercy, the encounter and acceptance by others are intertwined with the encounter and acceptance of God himself," Francis said. "Welcoming others means welcoming God in person!"