There is no room at the inn again this Christmas in Bethlehem. The little town's four small hotels are always filled at the holiday season. But in nearby Jerusalem, the usual base for Christmas pilgrims to the Holy Land, the military tension in the north and the brooding political situation have left plenty of hotel rooms empty.
''It's a heavy Christmas,'' says Bethlehem Mayor Elias Freij, a Christian Arab who is the one of the most moderate political figures on the West Bank.
Christian leaders in the neighboring town of Bait Sahur have declared a boycott on Christmas celebrations to protest the destruction by the military government of four houses belonging to the families of youths arrested during recent riots. Israel's annexation of the Golan Heights last week has made West Bank Arabs fear that a similar fate is intended for them. Mayor Freij, however, is determined that the holiday will be celebrated as usual in Christ's birthplace.
''We shouldn't disappoint hundreds of millions of people who will be looking at us.''
Mr. Freij was able to provide his people with an unexpected Christmas present last week when he obtained permission from the military government for the owner of the destroyed Beit Sahur houses to rebuild. Contributions, some from Israelis , have begun flowing in for the reconstruction.
Manger Square has been strung with decorations - most of them put up by the municipality, some by Israel's Tourism Ministry - and Israeli security forces are on hand to prevent any untoward incidents.
Despite the town's symbolism, Bethlehem's Christian character has been steadily slipping over the years.
Emigration of Christians, mostly to South and North America, has decreased their percentage among the city's 30,000 residents from 60 percent in 1975, when a census was taken, to what officials say today is 50 percent. Some, however, say that Muslims already outnumber the Christians.
''The Christians are better educated and more ambitious,'' says one Christian merchant who caters to the tourist trade. ''This ambition leads them to look for greener pastures elsewhere.''
Nevertheless, such is the power of the Christian elite in town that nine of the 11 city councilmen are Christian.
Many of the new settlers are Bedouins of the Ta'amra tribe which has long dwelled in the hills of the Judean desert fringing the city to the east. Many of the homes owned in town by the Ta'amras were built with money earned by selling fragments of the Dead Sea scrolls uncovered in desert caves three decades ago by members of the tribe.
Bethlehem also contains 14,000 Palestinian refugees who have been living in three refugee camps inside the city limits since fleeing Israel during that country's war of independence in 1948. All are Muslim and, except for a small number who own shops downtown, are barred from voting in municipal elections because they are not taxpayers. This has helped keep the Chrisitan leadership in power.
Unlike the sternly fundamentalist Islamic town of Hebron 20 miles south, which has no bars or cinemas, Bethlehem has 50 bars and three cinemas. Some Hebronites frequent an elite Bethlehem social club for mixed swimming (men and women) and mixed drinks, much as Saudi sheikhs travel to Europe for such pleasures.
This liberalism is matched by a political moderation epitomized by Freij, a short, unprepossessing businessman who has won respect as a sagacious, nondogmatic leader.
Unlike most other West Bank leaders whose enmity towards Israel dominates their conversations with foreign journalists, Freij can speak appreciatively of the positive side of Israeli character and policy while being no less forceful than his colleagues in condemning its negative side.
''We enjoy the openness and free speech in Israel,'' he says. ''Many of us believe that this is what has enabled Israel to be so strong.''
Freij views the increase of Israeli settlements and the Golan annexation as ominous signs of Israel's intentions.
One of the few Palestinian leaders to openly applaud President Sadat's visit to Israel and the peace opening this provided, Freij has not despaired of peace despite Sadat's assassination and Israeli actions.
This is the Christmas message - a low-key expression of hope for better days - emanating this year from Bethlehem.