Long Gamma-Ray Bursts (GRBs) are the most dramatic examples of massive stellar deaths, usually associated with supernovae (Woosley et al. 2006). They release ultra-relativistic jets producing non-thermal emission through synchrotron radiation as they interact with the surrounding medium (Zhang et al. 2004). Here we report observations of the peculiar GRB 101225A (the "Christmas burst"). Its gamma-ray emission was exceptionally long and followed by a bright X-ray transient with a hot thermal component and an unusual optical counterpart. During the first 10 days, the optical emission evolved as an expanding, cooling blackbody after which an additional component, consistent with a faint supernova, emerged. We determine its distance to 1.6 Gpc by fitting the spectral-energy distribution and light curve of the optical emission with a GRB-supernova template. Deep optical observations may have revealed a faint, unresolved host galaxy. Our proposed progenitor is a helium star-neutron star merger that underwent a common envelope phase expelling its hydrogen envelope. The resulting explosion created a GRB-like jet which gets thermalized by interacting with the dense, previously ejected material and thus creating the observed black-body, until finally the emission from the supernova dominated. An alternative explanation is a minor body falling onto a neutron star in the Galaxy (Campana et al. 2011).