Bethlehem marked Christmas on Thursday with crowds of tourists joining local Palestinian Christians in Jesus' traditional birthplace, as the West Bank town basked in its once-a-year appearance in the world spotlight.

The mood was upbeat, with hotel rooms fully booked and merchants reporting good business for the first time in years, as a long period of Israeli-Palestinian violence that dampened moods and tourism seemed to be easing.

Light rain fell on Bethlehem on Christmas morning. Crowds of worshippers and tourists carrying umbrellas walked briskly across the plaza in front of the Church of the Nativity, built atop the grotto where Jesus is believed to have been born.

Inside the dimly lit Crusader-era church, hundreds of people lined up five abreast between two rows of columns on one side, quietly waiting their turn to descend a few stone steps to the grotto.

Most of the people in the ancient church on Christmas morning were Asian, with a few Europeans and Americans joining them.

After ducking through the low entrance into the church, Wayne Shandera, 57, a physician from Houston, Texas, looked awed by the massive presence of the old stone church. "You feel in continuity with all the pilgrims through the ages who have been here," he said.

For Julie Saad, 55, from Denver, Colorado, the Church of the Nativity was part of a larger feeling. "Just being in the land where Jesus walked is an incredible spiritual experience," she said.

At the nearby Church of St. Catherine, the recently installed Latin Patriarch of Jerusalem, Fouad Twal, conducted his first Christmas morning service in his new role. For the Midnight Mass a few hours earlier, the church was filled on Christmas Eve with dignitaries, including Palestinian President Mahmoud Abbas, and tourists who obtained tickets and passed through security checks.

Christmas morning services were more relaxed. Most of the congregants were local Palestinians, with some tourists standing in the back, listening to the Arabic-language liturgy.

The outbreak of the Palestinian uprising against Israel in late 2000 and the fighting that followed clouded Christmas celebrations in Bethlehem for years, battering the tourism industry that is the city's lifeline.

Although holiday tourism numbers this year were still off from the tens of thousands who visited in the peak years of the late 1990s and the 2000 millennium, they were up from recent years, when just a few thousand visitors trickled in. Bethlehem officials said that over the course of the year, more than 1 million tourists visited their town, providing a much-needed boost to the local economy.

Still, all is not well in Bethlehem, despite the diminished violence and the relaunch of peace talks last year between Israel and the government of Abbas.

Bethlehem remains surrounded on three sides by a barrier of towering concrete slabs and electronic fences that Israel has erected. Israeli says the barrier is meant to keep out suicide attackers, but because it dips inside the West Bank, Palestinians see it as a thinly disguised land grab that strangles their economy.

Emigration, meanwhile, has slashed the town's Christian population to an estimated 35 to 50 percent of its 40,000 people, down from 90 percent in the 1950s.

The festivities in the West Bank town contrasted sharply with the mood in Hamas-run Gaza, 45 miles away. Militants there have been bombarding nearby Israeli communities with rockets and mortars since a truce expired a week ago, waiting to see whether Israel would act on its frequent threat to pummel them militarily.

The tiny Christian community in Gaza - 400 out of a total population of 1.4 million, called off its midnight Mass to protest Israel's blockade, imposed after the militant Islamic Hamas overran the territory last year and further tightened last month, when Gaza militants resumed rocket fire.