Elias Al-Araj's 200-room hotel is fully booked for the season, and he plans to open a 100-room annex. He says he already has bookings through July.
"This year, business was great," he said.
Bethlehem's economic fortunes are closely tied to the Israeli-Palestinian conflict. Tourism blossomed in the 1990s, when peace hopes were alive, but was crushed by the outbreak of fighting in 2000. Christmas after Christmas, tourists were scared off by Palestinian violence and Israeli travel restrictions.
With calm gradually returning to the West Bank, Bethlehem has again become a magnet for Christmas pilgrims.
"It's a difference between heaven and earth," said entrepreneur Mike Kanawati, who is so optimistic he's opening a new restaurant near the Church of the Nativity.
Palestinian officials say 1.3 million tourists have visited the West Bank this year, nearly double last year's level. The total for 2008 could rise to 1.6 million. The tourism boom has created 12,000 new jobs, said Palestinian Information Minister Riad Malki.
Bethlehem's 19 hotels are fully booked through January, said Mayor Victor Batarseh. He said he expects 30,000 visitors on Christmas Eve alone, compared with 22,000 last year, with about 5,000 more expected during Orthodox rites in January.
Batarseh said he hopes the signs of recovery will persuade more Bethlehemites to stay in their town. In recent years, growing numbers, particularly Christians, have emigrated.
"Calm and an increase in tourism will create more job opportunities and encourage families to stay in the city," said Batarseh, who is Christian. Officials say 40% of the town's 32,000 residents are Christian, down from 90% in the 1950s. The rest are Muslim.
Christmas decorations should be up by Monday. Palestinian President Mahmoud Abbas will light the Christmas tree, a large cypress, in Manger Square. Bands of yellow lights are already strung across the main road at the entrance to Bethlehem.
Bethlehem is a typical West Bank town, with congested streets and noisy markets, very different from the biblical idyll visitors might imagine.
"It's fascinating to see the place I heard about all my life," said Michael Creasy, 30, a software engineer from San Francisco, after emerging from the Church of the Nativity that stands over Jesus' traditional birth grotto. He said he'd love to stay for Christmas, but has to get back to work....