No pilgrims, just fury and frustration in the deserted town of Bethlehem

There were no pilgrims this chill, rainy Christmas in the little West Bank town where Jesus Christ was born, no decorated tree, no foreign choirs carolling in Manger Square.

A couple of skeletal signs left over from more optimistic times read: "Welcome to Bethlehem 2000." That was all.

The St George restaurant, next to the Bethlehem town hall, reopened for the first time in eight months after Israel lifted its month-long curfew in time for Christmas. Tables were set for 200 diners with red cloths, neatly folded white napkins, polished glass and silverware. It was an act of faith. They had no reservations.

Atiya Kamel, a waiter, 28, confided: "We want to show that if people come, we are ready to serve them." He is one of four workers kept on the pay roll, albeit on half wages. The St George, Bethlehem's biggest restaurant, used to employ 20.

Hardly anyone came.

Asked in his small Christmas Bell gift shop when he had last seen a tourist, Daoud Mansour ruefully replied: "[In] 1999. The only people we make a living from these days are the journalists." He had tried to sell his carved olive wood and mother-of-pearl Nativity tableaux via the internet, but bigger fish had got in first.

Only the religious ceremonies went ahead as scheduled. Yasser Arafat was there on wall posters, but not in person. Israel barred the Palestinian leader from leaving his Ramallah fastness. The Latin Patriarch, Michel Sabbah, went to greet him before leading the traditional procession from Jerusalem to Bethlehem.

The Holy Land's most senior Roman Catholic prelate prayed for Mr Arafat's well being, but he told reporters afterwards that both Israeli and Palestinian leaders should resign because they had failed to bring peace.

In his Christmas Eve sermon, the Palestinian-born Patriarch called on Israel to put an end to the occupation, which he said fed violence and terrorism. He urged the people of Israel, who go to the polls for a general election on 28 January, to find leaders with a vision of peace. Such leaders would bring the security that Israelis needed, he said, as well as security, rights and freedom for the Palestinians.

A chair, draped with the trademark black-and-white Arafat-check keffiyeh, was left empty in the front row during midnight mass in the modern St Catherine's Church next to the sixth-century Basilica of the Nativity. A boy in a red Santa costume filmed the ceremony on a camcorder.

Mr Arafat, a Muslim, attended for six years from 1995 as a symbol of Palestinian sovereignty. For 28 Christmases before that, the civil power was represented by the town's Israeli governor. Excluding Mr Arafat, last year and this, was part of Ariel Sharon's campaign to marginalise him, to brand him "irrelevant".

If politics is the bane of Bethlehem, tourism is its lifeblood. Three quarters of the population depend on it. In anticipation of a millennium boom, foreign governments and churches invested millions of dollars in refurbishing Manger Square and the old town market behind it.

Roads were paved, new hotels opened. A former pasha's palace became the West Bank's first five-star Intercontinental. The forbidding, British-built police station was razed and an international peace centre erected in its place.

Within months of a papal pilgrimage in 2000, the Palestinian intifada (an uprising with guns) and Israel's military response (with bigger guns) made a mockery of Bethlehem's hopes. Israel transferred the town to the Palestinian Authority before Christmas in 1995.

The tanks rolled back on 22 November, for the second time this year, after a suicide bomber slipped out of Bethlehem and blew up a Jerusalem bus, killing 11 passengers. The Israeli army pulled its troops out of the town on Monday, but it was too late to switch to festive mode, even if the 30,000 residents had wanted to. A few dozen protesters, mostly foreigners, paraded banners against the Israeli occupation, but the locals kept a low profile.

Captain Jacob Dallal, an Israeli military spokesman, explained why the army went in last month and is still keeping Bethlehem under surveillance. "Bethlehem was the only West Bank city where for several months there wasn't an army presence," he said. "Our idea was to have the Palestinian Authority take control, so that Bethlehem would stay quiet and serve as a model for other cities. The opposite happened. The Palestinian Authority did nothing and terrorists came in from outside and turned Bethlehem into a haven from which to attack Israelis. Alerts from there are still very high, so we cannot completely relinquish the city to the terrorists."

The walls of Bethlehem are plastered with tattered portraits of "martyrs", bold young fighters in green headbands, brandishing AK-47 assault rifles, who died either in gun battles with Israeli soldiers or by their own hands and explosive belts. An Arabic slogan, spray-painted in black beside the road leading to Manger Square, reads: "Avoid death from natural causes. Die by a bullet."

As part of his sales pitch, a grizzled old hawker, who badgered me to buy a necklace of semi-precious stones outside the Nativity church, boasted that he was "abu shaheed", the father of a martyr. An elderly man shopping in the market complained: "We are an oppressed people." But asked whose fault that was, he muttered: "I don't want to talk about politics." Most of the bombers and gunmen live in refugee camps and villages outside the town.

Bethlehem folk like to call themselves "moderates". Many middle-class Christians have emigrated to the Americas. Muslims outnumber Christians in the town by 65 per cent to 35.

"The feeling here is a mixture of anger and frustration," a veteran Bethlehem Arab journalist said. "People are angry at those who are using Bethlehem as a location to strike at Israeli targets. They are frustrated because they are afraid to condemn these attacks.

"We pay the price in curfews and closures, but we are not party to this game between the Israeli government and the militant organisations. Anyone who criticises knows he will be labelled a traitor."

Israeli security officials have hinted that the army might stay out of Bethlehem for another three weeks until after the Greek Orthodox and Armenians celebrate Christmas according to the Eastern calendar. Sceptical, intifada-weary local families are stocking their larders all the same.