I'm inclined to the saying of merry christmas as both courteousness and acknowledgement of a good practice - namely celebration of the founder of their faith, the prophet Isa (as). Christmas is about commemorating the birth of one of the most significant human beings in history and a prophet who is actually mentioned in the Qur'an more times than Muhammed (saw). What's not to like about wishing them happiness?
The notion of some attributing divinity to the person is a separate one which is disputed amongst christians.
Why do I say it is good? The Qur'an confirms Isa(as) and his mission and the prophet (saw) confirmed the goodness of the Jews celebrating the day of Ashura' (escape from Pharaoh) and adopted it saying Muslims had a greater right to celebrate such an occasion.
Historically our communities were separate in the Muslim heartlands so we wouldn't really have the same reality as we do today where we are forced to mix and integrate which forces the issue head on.
I wouldn't extend this argument to diwali and such like as these reflect fundamentally celebration of polytheistic values which are prohibited - so a happy diwali would be out for me just as celebration of fairies, ghouls, halloween, or even holocausts or genocides would be. It is what Ibn Al-Qayyim referred to when he said in Ahkaam Ahl Al-Thimmah:
"Congratulating the non-Muslims on the rituals that belong only to them is Haram by consensus, as is congratulating them on their festivals and feasts by saying: 'A happy festival to you' or 'May you enjoy your festival,' and so on. If the one who says this has been saved from disbelief, it is still forbidden. It is like congratulating someone for prostrating to the cross, or even worse than that. It is as great a sin as congratulating someone for drinking wine, or murdering someone, or having illicit sexual relations and so on. Many of those who have no respect for their religion fall into this error; they do not realize the offensiveness of their actions. Whoever congratulates a person for his disobedience or Bid'ah (innovation) or disbelief exposes himself to the Wrath and Anger of Allah."
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