Believers hold that a divine fire from heaven ignites a flame in the church, built on the site where Christians say Jesus Christ was crucified, buried and resurrected.
The flame is then passed between worshippers, candle to candle.
The crowd roared as the Holy Fire was lit, in an ancient annual rite dating to the 4th century AD to symbolise the resurrection of Christ on Easter Sunday, an AFP correspondent said.
Worshippers from various Christian denominations then processed through the church as pilgrims filed outside to a clamour of church bells.
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Earlier, police enforced tight security and crowd control measures to keep worshippers from surging into the church.
An Israeli police spokeswoman said tens of thousands of Christians attended the ceremony, packing the church and its surroundings.
Pilgrims had to elbow their way through Damascus Gate, as all other entrances to the Old City were closed for security reasons for several hours, trapping some worshippers outside the walls.
He said he and other diplomats visited the Easter procession to the church at the invitation of Jerusalem's Palestinian Christian community.
The procession was stopped at a security checkpoint before the church "despite earlier assurances... Of unhindered access", Serry said.
"The Israeli police refused to allow such entry claiming they had orders to that effect. A precarious standoff ensued, ending in an angry crowd pushing their way through."
After the ceremony, the Holy Fire was passed between worshippers in a procession to nearby Bethlehem's Church of the Nativity where Jesus is believed to have been born.