The creche pays tribute to the first Nativity Scene set up by Saint Francis of Assisi in the hamlet of Greccio 800 years ago, in 1223.
In that year the saint stopped in the village shortly after a journey to the Holy Land, and was inspired to reproduce the nativity there by its resemblance to Bethlehem.
On Saturday Pope Francis received in audience a delegation from Macra, the Piedmont town that donated the tree, and the central Italian Diocese of Rieti, which gifted the creche.
The donated fir tree had to be felled anyway because it was at risk of collapse, the Vatican said.
After the festivities, its wood will be used to make toys for children in need.
Francis said this showed how “small gestures are essential in ecological conversion”.
“They are gestures of respect and gratitude for God’s gifts,” he added.
The tree and the nativity scene will remain in the square up until the Feast of the Baptism of the Lord on January 7.
ANSA