[This is a fast-access FAQ excerpt.]
First of all, "God rest you merry, gentlemen" is correct,
not "God rest you, merry gentlemen." The verb "rest" is used
here in the way now most familiar from the phrase "rest
assured". In earlier English it was used with a variety of
other complements: the OED has "rest thee merry" from 1400;
"rest you well" from 1420; "God rest you merry", "rest you
fair", and "rest you happy", and "rest myself content" from
Shakespeare; "rest thee tranquil" from Shelley, and "rest thee
sure" from Tennyson.
The nouns "rest"="repose" and "rest"="remainder" are
etymologically unconnected: the former is from Germanic
(whence German Ruhe); the latter is from Old French rester
from Latin restare from re-="back" + stare="stand". Some
dictionaries connect "rest" as in "rest you merry" with
"rest"="remainder" rather than "rest"="repose". So "God rest you
merry" would mean "May God keep you (or make you and keep you)
merry." Semantic leakage from "rest"="repose" would explain why
we never see uses like "rest agitated" or "rest you sad."
People sometimes wonder whether "rest you merry" should
be "rest you merrily". Rest assuredly that it shouldn't. :-)
The song is now widely misunderstood as being addressed to "merry
gentlemen", first because this use of "rest" is now obsolete except
in the phrases "rest assured" and "rest easy", and secondly because
the familiar tune supports that stress pattern. A tune "once
ubiquitous in the West Country" of England and that better supports
the stress pattern of "God rest you merry, gentlemen" is given in
The Oxford Book of Carols (by Percy Darmer et al., Oxford, 1928)
and can be heard in The Carol Album, conducted by Andrew Parrott
(EMI, 1990, 0777-7-49809-2-0).
The other dispute about this phrase is whether the pronoun should
be "you" or "ye". In the references to the song retrieved by
AltaVista, "ye" outnumbers "you" by 5 to 1. Traditional grammarians
would prefer "you", since the pronoun is the object of the verb
"rest" and hence should be in the accusative. Although there was
some historical use of "ye" in the accusative (e.g., Thomas Ford's
madrigal "Since first I saw your face I resolved / To honour and
renown ye"), in the prestigious English of the King James Version of
the Bible, "ye" was always nominative and "you" was always
accusative. (This is counter-mnemonic, since "thou" was nominative
and "thee" was accusative.) The Oxford Book of Carols quotes the
words from a broadsheet published circa 1800 as: "God rest you
merry gentlemen". In A Christmas Carol (1843), Charles Dickens
wrote: "The owner of one scant young nose [...] stooped down at
Scrooge's keyhole to regale him with a Christmas carol: but at the
first sound of 'God bless you, merry gentleman! May nothing you
dismay!' Scrooge seized the ruler with such energy of action, that
the singer fled in terror [...]".