The Israeli army has pulled back to the outskirts of Bethlehem but Palestinian Christians found little to celebrate as the town of Jesus's birth faced a joyless Christmas.
Adding to the sombre mood was Israel's decision to bar Palestinian President Yasser Arafat from making his annual Christmas pilgrimage to Bethlehem for the second year running. It has accused him of not doing enough to stop violence.
There were no festive lights in Manger Square, where Israeli troops had patrolled for the past month after reoccupying the town following a Palestinian suicide bombing that killed 11 Israelis on a Jerusalem bus.
"Bethlehem is a sad city," Mayor Hanna Nasser said. "It's the first time in the city's history that the Christmas tree is not lit - in protest against the Israeli occupation." In an apparent goodwill gesture following appeals from Pope John Paul II, the Israeli army said it withdrew to the edges of Palestinian-ruled Bethlehem to allow Christmas observances to proceed.
But it warned that it would "continue to operate according to the security situation and existing terror threats".
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No soldiers were spotted near the Church of the Nativity in central Bethlehem, where local Christian dignitaries were due to attend Christmas Eve midnight mass, or in any of the surrounding neighbourhoods.
The Latin Patriarch Michel Sabbah travelled in procession to Bethlehem this afternoon accompanied by mounted Palestinian guards at a checkpoint on the edge of the town.
But troops and armour continued to surround the West Bank town as they have done during much of the two-year-old Palestinian uprising for independence.
The army said Palestinian Christians with security permits, foreign tourists and pilgrims would be allowed into Bethlehem for Christmas events. The Israeli move came a day after Mr Arafat lashed out against the army's grip on Bethlehem and its reoccupation of much of the West Bank.
"As the whole world adorns Christmas trees, Bethlehem...and the rest of the Palestinian cities and villages...are suffering from the darkness, siege, destruction, killing, arrests and abuses against our people at checkpoints," Mr Arafat said in the West Bank city of Ramallah.
Mr Arafat had annually attended Christmas celebrations in Bethlehem after it was handed to Palestinian control in 1995. He is now largely confined to his battered Ramallah headquarters after Israeli forces took over the city.
As the Christmas festivities took place in Bethlehem, a Palestinian child was killed when Israeli tanks opened fire in the northern Gaza Strip. The child was killed by shrapnel from a tank shell which also wounded another Palestinian.
Israel reoccupied every major Palestinian city and town in the West Bank, except for Jericho, in June following a wave of Palestinian suicide bombings which killed scores of Israelis.
Israeli troops re-entered Bethlehem and imposed a strict curfew on November 22nd after a suicide bombing carried out by a Palestinian from the town. They occupied buildings and conducted constant patrols, searching house to house and arresting dozens of suspected militants.