"Jingle Bells" rang out over Manger Square on Sunday as Bethlehem opened a Christmas market that the Palestinian city hopes will help cap a boom year for tourism with a profitable festive season.

"It has been an excellent year," Bethlehem's mayor Victor Batarseh said, forecasting 1.25 million visitors by the end of 2008 and noting a halving in local unemployment.

"We don't have any empty beds. Two years ago, all the hotels were empty."

Trade in the bibical birthplace of Jesus was devastated when the Palestinian uprising against Israel began in 2000 - months after a papal visit and millennium celebrations had seemed to lock in a rosy future for Bethlehem as a magnet for tourists and pilgrims in a region aglow with hopes for peace.

Eight years on, hopes for a final settlement with Israel have faded, like the patched up bullet holes in the Nativity Church which bear witness to a five-week siege in 2002. But a decline in violence has tempted back tourists who no longer fear suicide bombers and gun battles erupting in the streets.

"We have witnessed a rebound in tourism," said Khouloud Daibes-Abu Dayyeh, the Palestinian Authority's tourism minister as she toured the handicrafts and festive decorations on sale from wooden booths in the German-style Christmas market.

"We have put Palestine back on the map as a destination," she added, noting hotel occupancy rates were now typically above 70 percent, compared to 10 percent a few years ago.

Israelis attribute some of that calm on the streets of nearby Jerusalem to the construction of hundreds of kilometers (miles) of walls and fencing around the West Bank. People in Bethlehem blame the barrier for discouraging visitors, who must pass through Israeli military checkpoints to reach the city.

"When we came, we saw the watch tower. It's not so good for Christians," said Kinga Mirowska, 24, from Krakow, Poland, as she headed for the spot where Christians believe Jesus was born to Mary in a manger because Bethlehem's inns were full.

Stress and prayer

Khalil Salahat runs a souvenir store packed with olive wood crucifixes and Nativity cribs. Unlike many neighbors, whose shops remain shuttered even in the Advent season before Christmas, Salahat stuck through the lean years but is not about to declare all his problems over as world recession looms: "It's better than last year," he said, looking forward also to an expected visit by Pope Benedict in May to bring a boost.

Daibes-Abu Dayyeh saw tourism and peace intertwined: "We see tourism as a tool to achieve peace in the Holy Land?and to break the isolation from the outside world."

Burgeoning numbers of eastern European pilgrims are bused in on whirlwind day-trips from Egypt's winter sun resorts on the Red Sea, a five-hour desert drive to the south.

Even with more time, Bethelehem can be a confusing place - a mainly Muslim city where the call to prayer from the mosque on Manger Square drowned out the Christmas carols playing for the tourists and where palm trees and warm sunshine contrasted with the snow-capped Santa Claus figures on sale at the market.

But for many Christians it remains a moving experience.

"This is the home of Christmas," said Dennis Thomson, an American working in Jerusalem, who was visiting on Sunday.

"This is so important to our world," said Violetta Krupova, a retired Russian doctor from St. Petersburg, who was visibly moved as she left the church where local priests wafted incense and chanted Latin. "I have wanted to come here for so long."