At Bethlehem's plushest hotel, the only thing missing is guests

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"This is one of the best properties in the Inter-Continental hotel chain," Rami Zeidan said. "They tell me it's number four or five."

"This is one of the best properties in the Inter-Continental hotel chain," Rami Zeidan said. "They tell me it's number four or five."

The Jacir Palace is indeed a fine Ottoman-era edifice, built around a courtyard with arched windows and stone floors polished by more than a century of feet. The thing missing is any guests. "There are just cancellations," said another staff member.

The 250-room hotel, which opened in May, is in the heart of Bethlehem, on the front line of the confrontation between Israel and the Palestinians. A few yards from the entrance is a Palestinian Authority checkpoint; just to the left is Rachel's Tomb, a heavily fortified Israeli army post and the scene of daily clashes between Palestinian youths hurling stones and petrol bombs, and the troops who reply with rubber-coated bullets, teargas and live rounds. Directly in front of the Jacir Palace, the road is littered with rocks and scorch marks from Molotov cocktails.

One of the hotel's new wings is named after Beit Jala, the nearby hillside community hit this week by rockets, missiles and machine-gun fire from Israeli tanks and helicopters retaliating against Palestinian gunmen shooting at the settlement of Gilo on the opposite hill. His staff say the gunfire can be clearly heard from the hotel, but Mr Zeidan, the sales manager, bravely speaks of plans to lure international conferences, business clients and "the crÿme de la crÿme of the pilgrim trade.It's only 10 minutes from here to the centre of Jerusalem."

That might be true in normal times but on the main road to Jerusalem there is an Israeli checkpoint enforcing a crippling blockade of the occupied Palestinian territories. The UN estimates half the Palestinian GDP, nearly $200m (£138m), has been lost since the latest violence began on 28 September. Freedom of movement in Palestinian areas, as well as to and from Israel, is affected. "I live in Beit Jala," a hotel worker told me. "It took me more than an hour today for what is normally a 10-minute journey. I was half an hour late, but some staff can't get here at all."

As I left, the first stone-throwers of the day were finding their range, despite a heavy downpour. "It is a good idea to go now," said the doorman. "Every day we have to close about this time to keep the teargas out."

The blockade is frightening off the tourists on whom Bethlehem depends. In the deserted Church of the Nativity, a guide showed me the alleged birth place of Christ, saying: "Normally this place would be crowded. We have war and it's not war, we have peace and it's not peace. We don't know what situation it is."

It was the same story outside in Manger Square, where a shopkeeper selling religious artefacts had had no customers for two weeks. "We have 12 workers in our factory, feeding four families," said the shopkeeper, who would not give his name. "I have orders from overseas, but the Israelis won't let me send them out. The peace process helped us. Last year business was very good, but this is worse than the last uprising. At least some tourists used to get through."

The Israeli Prime Minister, Ehud Barak, desperately negotiating with the right wing to keep his job, is talking of a unilateral "separation" of the Palestinian territories from Israel. Government studies claim to show that the cost to Israel would be no more than 1 per cent of GDP. But a visit to the exclusive Jerusalem Mall, just over the hill, showed that even the temporary closure is hurting Israelis too.

Shopping malls have been bombed in the past, and Israeli customers are staying away. "Until last month we also had Arabs from Israel and Jordan, but they don't come now," the manageress of an espresso bar said. "Our takings are down." In the Versace shop, the manager sat alone. "People are worried about terrorism," he said. "Business is terrible." Would it get better? "I don't know. I hope so."