The Pope has warned Britain of the "increasing marginalisation of religion" in a highly political speech to MPs and peers in Westminster Hall.
The speech follows six arrests of men in central London on suspicion of terrorism connected with the papal visit.
In his address to an audience of MPs, peers and prominent figures in British politics, the pontiff blamed "the lack of a solid ethical foundation for economic activity" for the recent global financial crisis.
Among those attending were former prime ministers Margaret Thatcher and John Major, as well as Tony Blair and Gordon Brown.
The two men, whose battle against each other recently sparked off again with the publication of Mr Blair's outspoken memoirs, sat down together and chatted while waiting for the Pope to appear.
They listened as Pope Benedict XVI told Britain's representatives that religion offered "the ethical foundation for political choices".
He dismissed those who argued that the public celebration of religious festivals like Christmas should be suppressed because it "might somehow offend those of other religions or none".
And he added: "I would invite all of you in your respective spheres of influence to seek ways of promoting and encouraging dialogue between faiths and religion at every level of national life."
Outside Westminster, a crowd of several hundred protestors gathered, many of them demonstrating against the abuse of children in the church.
The speech did not reach the politicised heights of yesterday's speech, when he offered a "truncated vision of man and of society" in British society.
The Pope flew to London from Scotland yesterday evening and stayed the night in Wimbledon. He was met off the plane by London mayor Boris Johnson, who presented him with several books, including his own historical contribution, To Dream of Rome.
His day began in St Mary's University College, Twickenham, where protestors gathered to demonstrate against his presence.
Activists are protesting the visit for its duration, with a major demonstration in central London tomorrow.
But the trip to the University, which involved a 'big assembly' linking up young people at every Catholic school in the country, caused particular anger by reminding many demonstrators of the Catholic Church's approach to sexual abuse by its priests.
"The Catholic Church is shocked and ashamed by the scandal of child abuse committed by clergy and other people in positions of trust in Church institutions," notes provided to journalists ahead of the visit read.
Archbishop Nichols commented: "There is nothing that can be said that eases the crimes committed by members of the Church against children... I would only add... the arrangements put in place in this country by the bishops are probably a benchmark for how these issues should be dealt with elsewhere."
The Pope later met Archbishop of Canterbury Rowan Williams at Lambeth Palace, in a symbolic gesture designed to cement impressions of reconciliation. He has now moved to Westminster Abbey where he and Dr Williams will pray together at the tomb of Edward the Confessor.
The decision to send the Pope to the Archbishop, rather than the other way round, is a sign the Vatican is keen to develop better relations with the Church of England.
Cardinal Walter Kasper, who had to pull out the trip after he said visiting Britain was like coming to a "Third World country", was a major loss in that respect. His excellent English meant the Vatican was relying on him to smooth over complications in the relationship between the two churches.
A state banquet will follow later in the evening, although the Pope is not expected to attend.