It is easy to be outraged when the Pope blames Nazism on atheists but I think it's important to also understand the basis for his wrong-headedness.
I do not believe the author of a series of encyclicals that is essentially a Catholic/ Existentialist death-match (next, Pope Benedict and Jean Paul Sartre!) has not thought this through.
Benedict's experience of growing up in Nazi Germany may mean he associates God-lessness specifically with a world in which Man's power was unleashed in a perversion of Nietzsche's conception of the "Superman". So, perhaps also projecting a certain amount of guilt for not having done more to resist, he may possess a particular dread of the God-less state, and associate it automatically with Nazism.
But he is wrong to conclude atheists "created" the Nazis - atheism may have been a characteristic (and not much of one at that - witness Himmler's attempts to re-imagine Nazism as a Pagan cult) but Christianity was arguably its genesis.
In Straw Dogs John Gray demonstrates how despite having "murdered" God, the post-Enlightenment West and its ideological off-spring remain culturally Christian, particularly in a tendency to promise Heaven here upon the Earth - Utopianism.
It's a destructive fallacy we cannot shake off - from the Jacobite Terror, through Stalin and Hitler, to Neo-Conservatism. Unlike the Greeks and Romans Nietzsche admired (and whose age he wished to recreate, free from the shackles of "slave" religion), all have peddled the idea of a "promised land" - and led their followers to destruction.
For a man so supposedly endowed with intellect to ignore this is a considerable flaw. To enlist the Jews, for whom 2000 years of Christian persecution culminated in genocide, to make his point, is simply grotesque.