BETHLEHEM, West Bank — They are lining up once again by the hundreds, candles in hand — Spaniards, Russians, Sri Lankans — to descend into the ancient grotto where tradition says Jesus was born. Outside in Manger Square a municipal tree shines with decorations, and telephone wires bear glittery stars in seasonal spirit.

It might seem obvious that in the days leading up to Christmas this city, which lives in the hearts of Christians worldwide, would become a tourist magnet. But only six years ago the Church of the Nativity was the site of a five-week standoff between Israeli troops and armed Palestinian militants. Even today, getting into Bethlehem requires passing through an Israeli checkpoint under the shadow of the enormous Israeli separation barrier.

Yet there are more tourists in Bethlehem this year than at any time in a decade, and their presence signals something beyond the Christmas spirit: life for West Bank Palestinians, oppressive and challenging though it remains, seems to be making substantial, if fragile, improvement.

Both Israeli and Palestinian officials report economic growth for the occupied areas of 4 to 5 percent and a drop in the unemployment rate of at least three percentage points. The Israelis report that in 2008, wages here are up more than 20 percent and trade by 35 percent. The improved climate has nearly doubled the number of tourists in Bethlehem and increased them by half in Jericho.

It is not just tourists. The Bethlehem Small Enterprise Center, financed with German aid, has been open for eight months and is busy helping printers improve their software and olivewood craftsmen their marketing.

“It has been the best year since 1999,” said Victor Batarseh, mayor of Bethlehem. “Our hotels are full, whereas three years ago there was almost nobody. Unemployment is below 20 percent. But we are still under occupation.”

And all this in a year when the global economy has been sinking at an alarming rate.

Politically, as the mayor notes, there is little real change. A year of negotiations with Israel is drawing to a close without an agreement on Palestinian statehood.

The president of the Palestinian Authority, Mahmoud Abbas, whose term officially ends on Jan. 9, has said he will call new elections in the coming months. Hamas says that he must step down on Jan. 9 and that it will name a competing president if he does not, raising concerns of further instability. Israel has its own elections in February, adding to the uncertainty.

For the Palestinian Authority, the balance between heralding achievements and keeping up criticism of Israeli policies is delicate — especially with the conservative Israeli opposition leader, Benjamin Netanyahu, leading in polls for the elections, advocating an emphasis on an “economic peace.”

The Palestinians say that a sound economy alone will not bring peace, that the conflict requires a political solution.

Still, Palestinian forces are guarding major cities, Israeli troops have stepped back — although they continue nighttime raids on people suspected of being militants — and Israel says it is about to significantly ease some restrictions on Palestinian movement in the West Bank, a prerequisite for further economic growth.

A senior Israeli official in the northern West Bank said that 4,000 Israeli Arab citizens were driving in to shop in the area every weekend and that 115 new stores had opened in the city of Tulkarm in the past four months.

Even in Nablus, a volatile city of 200,000 that has been subject to a particularly suffocating Israeli security operation, the atmosphere is beginning to change. A gleaming mall owned by the municipality, under construction since 1999, finally opened earlier this year.

Ahmed Ayed, 22, manages a women’s clothing store there. Sporting long hair and a goatee, he said the outlet, the sixth in Nablus of a chain owned by his father, opened half a year ago; a seventh has since opened nearby.

Ziad Anabtawi, chairman of the Anabtawi Group, which includes import, distribution and investment companies, says the Palestinian economy is much healthier today than it was in the 1990s, when it was based on laborers working in Israel, their entry dependent on Israeli good will. Today, it involves large Palestinian investment companies and bankers.

The old city of Nablus, known as the casbah, was until recently a danger zone where Palestinian gunmen frequently clashed with Israeli forces. On a recent afternoon, groups of women relaxed, smoking and picnicking, at a historic Turkish bathhouse, the Shefa Hamam.

A bastion of Mr. Abbas’s Fatah movement, Nablus also became a stronghold of Hamas. Candidates widely associated with Hamas swept local council elections in 2005, winning 13 council seats out of 15.

But prosperity, business people there say, depends on Israel’s removing the major checkpoints it erected in 2002, a step it said was necessary to prevent the movement of suicide bombers.

For six years, Palestinians have not been able to drive private cars in or out of Nablus without special permission. The Israeli military says that is about to change. Within a few weeks the army is planning to allow Palestinians from the northern West Bank districts of Nablus and Jenin to drive to the south in their own cars, without special permits and with only random inspections.

“We as a command are willing to take more risks as hostile terrorist activity goes down,” said Col. Benny Shik, a senior Israeli military official in the West Bank.

Adly Yaish, the mayor of Nablus, said he had heard about the proposed changes and called them “a good start.”

The way ahead, though, is dotted with pitfalls. The Israeli military emphasizes that all changes can be reversed. And the Israeli measures to suppress Hamas can sometimes be clumsy and counterproductive. Both Mr. Anabtawi and Mr. Yaish have spent time in Israeli detention in the last year because they were suspected of having financial links with Hamas. Israeli judges ordered them released.

In the West Bank, Hamas is currently subdued, with its armed men deep underground, its political leaders in Israeli jails and those representatives still at large in the local authorities diligently playing by Palestinian Authority rules.

The governor of Bethlehem, Salah Tamari, an advocate of coexistence for decades, said Hamas was weakening in the West Bank as people saw how hard life was in Gaza. What he really worried about was a future with Israel despite his years of Israeli friendships.

In his office, the curtains to his right were drawn shut to keep out the view of the opposite hill of Har Homa, a huge Jewish suburb whose construction he had worked against in the 1990s.

“Israelis are paranoid because of their past, while Palestinians are paranoid because of their present,” Mr. Tamari said. “But we are doomed to live together or blessed to live together, depending on your point of view. It is true that the economy is improving slightly. But beyond that, I’m afraid very little is getting easier.”

http://www.nytimes.com/2008/12/24/world/middleeast/24bethlehem.html?ref=todayspaper&pagewanted=print

Copyright 2008 The New York Times Company