Tower of smoke uncoils over Basilica of the Nativity as clerics, civilians and Palestinian gunmen defy Israelis

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It was a sight sickening to hundreds of millions of Christians and the source of outrage among senior clerics across the world. A tower of smoke uncoiled high above the rooftops of Bethlehem yesterday, testimony to a fire burning by the church marking the place of Christ's birth.

At the scene of the blaze lay a corpse, that of a 23-year-old Palestinian policeman, shot through the head while he was inside a holy site. Khaled Syam was picked off by an Israeli sniper as he was trying to douse the flames, said a colleague.

Fire and death reached the walls of the Basilica of the Nativity, which has become a sanctuary for more than 250 clerics, refugees, Palestinian security men, and armed guerrillas besieged by the Israeli army for a week.

The basilica is the oldest continuously used church in the world. It has survived the Crusades, the looting Ottomans, a severe earthquake in 1834, a devastating fire in 1869, the Israeli invasion of the West Bank in 1967 and the first seven-year Palestinian intifada. Yesterday it narrowly escaped another calamity, although not without bloodshed.

Allegations were flying last night over who started the blaze in a meeting hall above a courtyard at the entrance to a 19th century Roman Catholic Church, St Catherine's, which abuts the basilica and is only a few dozen yards from the underground grotto where Christ is believed to have lain in the manger.

Israeli generals have declared the area closed to the press. When we reached within 50 yards of Manger Square, within view of the church's tiny ancient wooden door, five Israeli soldiers charged at us down an alley, bellowing angrily and firing their M-16 rifles into the air. An earlier attempt was cut off by an Israeli Merkava tank, which turned its gun on us within 20 yards of the church.

Witnesses said the fire burnt for an hour, destroying precious altar cloths and furniture before the Israeli army allowed efforts to put it out. Palestinian officials said Israeli troops started it with a smoke grenade. A spokesman for the Franciscans, who run St Catherine's, said equipment from the Israeli army was found inside the compound, suggesting the fire was part of an attempt to flush out the occupants.

Residents say that at night, the army has been letting off sound grenades, coupled with loudspeaker demands for those inside the church to leave. "Last night the Israeli army used ladders and threw grenades on the church," the governor of Bethlehem, Mohammed al-Madani told The Independent. Speaking by telephone from inside the basilica he said: "They burnt a priest's room. The situation is very dangerous. Israel should withdraw from Bethlehem and the young men will go."

The Israeli army's spokes-man admitted that its forces used smoke grenades but said Palestinian "terrorists" inside the church started several fires when they threw hand gren-ades and shot at positions around the compound, injuring two Israeli border troops, one seriously. He said the army killed the Palestinian after soldiers were fired on while trying to help wounded men.

Whatever the cause, it was not enough to deter Ariel Sharon, the Israeli Prime Minister, from continuing with his tactics, despite mounting anger across the world.

Hours after the early morning fire, he told the Israeli Knesset that his soldiers would continue surrounding the church until the Palestinian gunmen inside surrendered.

That much was clear on the narrow streets. Once tramped by thousands of tourists and pilgrims every day, they are now a tragic mess. Their stone walls, recently spruced up with European money and UN aid are torn with bullet and shell holes. The stores selling religious trinkets are shuttered. Every few minutes yesterday, there was a burst of gunfire.

The 60 or so clergy holed up inside the basilica, who include four Franciscan nuns, are from at least four denominations – Roman Catholic, and the Greek, Armenian and Syrian Orthodox churches. There are tourist police, forces from Yasser Arafat's security forces, refugees and militia men, including Ibrahim Abayat, head of the regional branch of the al-Aqsa Martyrs Brigades.

This strange crowd, many of them young men who sought refuge in Manger Square after the Israelis first stormed Bethlehem's refugee camps last month, is surviving on sparse rations of rice and spaghetti, provided by the Franciscans. The electricity has been cut off.

A spokesman for the office of the Custodian of Catholic sites in the Holy Land described yesterday's events as a "violation of every canon of human decency".

Father Ra'ed, secretary to the Latin Patriarchate in Jerusalem, said about 20 people inside the church were wounded. He said Palestinian Red Crescent ambulances had been forced to turn back when they tried to reach Manger Square because Israeli troops opened fire.