"Don't convert Bethlehem into a ghetto" and "The wall strangles the birthplace of Jesus" read banners prominently placed over Manger Square.
The barrier, meant to keep Palestinian attackers out of Israel, dips deep into the West Bank. Palestinians strongly oppose the structure, saying it is an illegal seizure of land they claim for a state.
The barrier -- a series of concrete walls, trenches, razor wire and fences -- cuts off parts of Bethlehem from the town itself and from nearby Jerusalem.
Bethlehem residents said the hardships brought about by the violence and Israeli military measures, left little room for Christmas cheer.
But since the violence erupted in late 2000, Israel has prevented Arafat from making the 20km trip from his battered West Bank headquarters.
Christmas Eve used to be the peak of business for many Bethlehem shopkeepers. On Wednesday, half the shops in an arcade lining one side of the square were closed.
"We don't have pilgrims, no tourists, nobody," said Bethlehem resident Elias Abu Akleh, 52, standing in the middle of the sparsely populated square. "For whom are they going to open?"
A group of Palestinians carried signs against the barrier the length of Manger Square. Christmas "gives us an opportunity to tell the world, `we are suffering, please help us to stop this wall,'" said Hazem Azza, 24, a university student.
Relatives of 26 Palestinian gunmen who were expelled after holing up in the church during a monthlong standoff with Israeli forces in May last year also used Christmas to share their grief. A child with a Santa Claus cap held a picture of her father and a Palestinian flag.
But the political emphasis dismayed Mahran Tawwil, 19, a student from nearby Beit Sahour.
"We came here to celebrate Christmas, not to deal with other problems," he said.
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