City life BETHLEHEM: 2,000 years have passed - and once again there'll be no room at the inn

"BETHLEHEM HAS finally taken off," Joseph Canavati, the owner of the Alexander Hotel, exulted. "It's the best thing that's happened here since Jesus Christ."

Ever since the 1970s the world's media have trekked to this little West Bank town every December and reported: "If Joseph and Mary came to Bethlehem this Christmas, there'd be plenty of room at the inn." They lamented the potholed roads, the shabby buildings, the kitschy gift shops. Even the fading intifada slogans, it was said, looked as if they needed a new coat of paint.

At last, as Bethlehem launches itself into the 2,000th anniversary of its most revered son, there are glad tidings to bring. This Christmas, for starters, there really is no room at the inn. Mr Canavati reported 95 per cent occupancy in his 48-room hotel throughout the autumn, with every bed taken for the Christmas and new year weekends. The mayor, Hanna Nasser, said Bethlehem could have filled twice as many rooms if only it had had them.

A record 150 buses, carrying about 6,000 millennium pilgrims, have trundled into town every day for the past three months. Unlike previous years, when local traders complained that the Christians visited the Church of the Nativity, quickly returned to their buses and sped off to Jerusalem three miles to the north, many are staying for as long as four or five nights, using Bethlehem as a base.

The town, which has enjoyed a building boom since the 28-year Israeli occupation ended in December 1995, now offers 1,250 hotel, hostel and bed-and-breakfast rooms, mostly doubles. More hotels are sprouting along the road to Manger Square. A former pasha's palace is being converted into the holy city's first five-star InterContinental.

Bethlehem expects 50,000 visitors this Christmas, two and a half million by the end of next year. Pope John Paul is coming in March. At least eight heads of state, including Russia's President, Boris Yeltsin, and the president of the World Islamic Conference, are already booked in.

Mr Nasser said: "We feel we will be newly reborn." Although 65 per cent of the town's 30,000 Arab inhabitants are Muslims, Mr Nasser insisted they would join the Christian minority in the celebrations. They have cause to do so.

Since last Christmas, Bethlehem has been transforming itself. Its main road has been widened, resurfaced and divided into a dual carriageway. Manger Square, once decried as the world's holiest car park, has been paved and pedestrianised. The British colonial police station no longer casts its ugly shadow.

An elegantly modern museum has replaced it, limited to two storeys to avoid dwarfing the hunched, sixth-century Nativity church at the end of the square.

Backed by a $25m (pounds 15.6m) loan from the World Bank, the Palestinian Authority's $180m Bethlehem 2000 project is showing results. The old city, above Manger Square, has been cleaned and paved in local limestone. Doors, window frames and steel shutters have been painted a smart, uniform duck- egg green. (Asked how the authority had persuaded them all to adopt the same colour, one shopkeeper explained: "They'd fine you if you didn't.")

Sweden contributed $8.5m for the square. Belgium, Norway, Spain and Japan adopted blocks of old houses and alleys. Private investors are lining up behind them. Yet the old city, for all its spanking new squares and civic sculptures, remains a place where people live and shop.

There are more grocers and butchers, cobblers and ironmongers than tourist traps. Peddlers hawk shoes at the equivalent of five pounds a pair. Housewives snap up giant cauliflowers for pennies.

Israel is racing against time to finish resurfacing the Jerusalem-Bethlehem highway. Pilgrims will have to tolerate the clank and dust of work in progress in the town for a while longer. They do not seem to mind. Ken Zapp, an economist from Minnesota, said before boarding his bus: "There's a vitality here. Bethlehem's growing. That's good for everyone."

On my way out, I noticed a perfect swords-into-ploughshares symbol for the millennium of peace: a brass shell case, finely incised in Arabic calligraphy, with the spout and lid of a Turkish coffee pot grafted on to the top. How much was it, I asked the shopkeeper. "$300," he answered. "It's an antique."

Perhaps Bethlehem has not changed that much, after all.