Bethlehem Pins Its Hopes on Peace : Holy Land: The city protests its occupation by banning civil festivities. Tourists and pilgrims emboldened by the Mideast talks are trickling back.

A watchtower manned by a gun-carrying soldier blocks the view of the bare Christmas tree on Manger Square. Rain is pouring through the leaky roof of the Church of the Nativity.

There isn’t much Christmas cheer in this Palestinian town where tradition says Jesus was born. Municipal leaders say that, in solidarity with the Palestinian uprising, only religious celebrations will be allowed this year.

Still, tourists and pilgrims, apparently emboldened by the Middle East peace process, are trickling back to Bethlehem after three slow years because of the uprising and the Persian Gulf crisis.

“Our business depends on politics. Last year, we didn’t have any business at all, but . . . people feel safer when they see Arabs and Jews sitting down together to talk peace,” said Saleh Canavati, 46, whose souvenir shop sells nativity scenes and tree ornaments carved from olive wood.

On a rainy December morning, just three tour mini-buses were parked outside the Church of the Nativity.

“We are a little bit concerned about security and we try to be back inside after dark,” said Margaret Shipman, 65, a visitor from Eugene, Ore. She said five members of her church group stayed home out of fear.

Even on this quiet morning, there were bleak reminders of the Palestinian-Israeli conflict.

Paramilitary police patrolled the square. A police Jeep was parked near the church and a soldier in the 30-foot-high watchtower trained his rifle on the street below.

Manger Square has been the scene of violence this year. On April 30, a French woman was stabbed to death in a restaurant; on Sept. 10, an Arab gunman killed a suspected Palestinian informer nearby. Tour buses have been stoned as well.

At Christmas, security gets tighter because Israel fears a spectacular Palestinian attack while the eyes of the world are on Bethlehem. Visitors must pass through checkpoints and metal detectors.

Christmas here has been a political issue since the uprising began in December, 1987.

Each year, Bethlehem residents have staged a general strike on Christmas Eve to protest the Israeli occupation. The city has refused to decorate streets or give the usual receptions for visiting officials and parades of drum-beating Boy Scouts.

“I don’t think there is going to be a change from last year,” municipal secretary Jamal Salman said. “We’ll stick purely to the religious ceremonies. There is nothing to be joyful about. The peace process hasn’t shown any results.”

The Israelis, to soften their image, have put up street decorations on the road to Bethlehem each year and invited choirs from abroad to sing in Manger Square. They say the watchtower will be taken down for Christmas Eve.

This year, there is optimism that more visitors will come to Bethlehem, a town of 50,000 about 5 miles south of Jerusalem.

Yossi Shoval of the Israeli Tourism Ministry predicted there will be several thousand visitors in Bethlehem at Christmas, based on increased tourism in Israel in the past three months.

In October, 143,000 tourists arrived, compared to 82,000 in October, 1990. Figures for November were not available.

About 10% of Bethlehem’s 300 hotel rooms are booked for Christmas, said Salman, the municipal secretary. “Last year there were no guests at all,” said Costa Kreitem, manager of the Palace Hotel.

Canavati, the souvenir merchant, has rehired 25 laid-off employees, and the 200-seat Andalus Restaurant is serving lunch to some 50 tourists daily after being closed for months.

Salem Giacaman, who sells olive wood carvings in a nearby shop, complained that business is so slow that his carvers are working only two days a week.

Meanwhile, even Bethlehem’s main attraction, the 4th-Century Church of the Nativity built over the spot where tradition says Jesus was born, has its troubles.

In late November, Israel’s military government announced that it had fixed the leaky roof, ending a dispute over repairs among three Christian sects.

Later, a three-day rain left puddles spread over the stone floor and water running down the inside walls. The military government said the contractor would make good on the repairs before Christmas.