The wood piece, just a few centimetres long, was once kept in the Basilica of Santa Maria Maggiore in Rome. It was handed over earlier this week to the custodian of the Bethlehem church, who said it brought "great honour to believers and pilgrims in the area".
The provenance of ancient relics is often questionable. Still, they are revered by the Christian faithful, among them the coachloads of pilgrims who squeeze through a narrow sandstone entrance in the Church of the Nativity to visit the birth grotto that is its centrepiece.
According to the Custos of the Holy Land for the Catholic church, Francesco Patton, the relic dates back more than 2,000 years and was sent to the Vatican in the 7th century.
Encased in a silver-coloured ornamental table-top stand, the relic was unveiled to the public on Friday at the Notre Dame of Jerusalem Center, before it was taken to Bethlehem on Saturday.
A procession of marching bands greeted the relic as it arrived in Bethlehem. It was placed in Saint Catherine's Church, at the Church of the Nativity compound in Manger Square.
"We are proud that part of the manger is back in Bethlehem because we feel that the soul of God is with us more than before," said Chris Gacaman, 53, a Bethlehem homemaker, as she stood outside the church.
Others were a little let down.
"It's a small piece, we thought it would be a bigger piece," said Sandy Shahin Hijazeen, 32. "When we heard that the manger is coming back we thought it would be the whole manger, but then we saw it."
Bethlehem, in the Israeli-occupied West Bank, is usually particularly busy ahead of Christmas on Dec. 25, with tourists and pilgrims flocking to the Biblical city. Christians make up around 1% of the Palestinian population in the West Bank, Gaza Strip and East Jerusalem.