The town known as Jesus' traditional birthplace, occupied by Israeli Army troops for the first time since 1994, marked a dreary Christmas Eve Tuesday night.

After more than two years of Israeli-Palestinian violence, "there is no joy in people's hearts," said Raed Zarrouk, 26.

With few pilgrims, no light-laden tree in Manger Square, and no bells and music, Bethlehem was less than festive. Although Israeli soldiers withdrew to the outskirts to allow celebrations to take place, locals said they could not remember a sadder Christmas.

Protesting the presence of troops, town leaders canceled all Christmas festivities except religious observances. The highlight is Midnight Mass at St. Catherine's Church next to the Church of the Nativity, the fortress-like 4th-century church built over the grottos where, according to tradition, Jesus was born.

As in years past, Latin Patriarch Michel Sabbah delivered the sermon at the Midnight Mass service. Sabbah, the highest-ranking Roman Catholic clergyman in the Holy Land, led a procession from Jerusalem. He was greeted by Palestinian Boy Scouts carrying -- instead of the traditional drums and bagpipes -- Palestinian flags and pictures of Yasser Arafat.

Christmas in Bethlehem, which once attracted tens of thousands of pilgrims and Palestinians, has been subdued for the past two years because of Palestinian-Israeli violence. But this year marked a new low.

The tall fir tree in Manger Square, usually covered with colorful lights and ornaments, stood bare. The platform built each year for choirs to serenade the holiday-makers in Manger Square was absent.

With the violence crippling Bethlehem's tourism-based economy, many souvenir shops shut down. Only a few tourists braved the tension to visit the town.

The Israeli Army entered the town last month after a Palestinian suicide bomber from Bethlehem blew himself up in a bus in nearby Jerusalem, killing 11 people. Israel maintains it needs to keep its troops there in order to prevent more attacks.

On Christmas Eve, troops kept a tight grip on roadblocks and checkpoints on the outskirts of Bethlehem. Palestinian police in plain clothes directed traffic and erected barriers to guide worshippers to Midnight Mass.

The chief Israeli army liaison officer in Bethlehem, Lt. Col. Moshe Madar, indicated that the pullback was temporary.

"What we are doing is trying to compromise between security considerations and freedom of worship," he said on Israel TV.

Several dozen protesters -- most of them foreigners -- marched around the square with signs protesting Israel's occupation of the West Bank and Gaza. "No peace with settlements," read one, referring to the 150-odd Jewish communities in the West Bank and Gaza.

Carrying a handful of protest signs, Bassam Bannoura, pastor of the Shepherd's Field Baptist Church in neighboring Beit Sahour, said Christians are leaving the Holy Land because of the twin hardships caused by the rise of Muslim fundamentalism and Israeli policies. One family of Christians planning to leave "told me, 'We have only one life and we want to enjoy it,"' said Bannoura, 45.

Arafat, barred by Israel from Bethlehem for the second Christmas in a row, appeared on Lebanese television and complained about the lack of international action to force Israel from the town.

"Isn't it my right to ask why the world did not move when Israeli guns were turned toward the statue of the Virgin Mary?" he demanded.

In the front row of St. Catherine's Church, an empty chair draped with an Arabic keffiyeh headdress symbolized Arafat's absence. In his sermon Sabbah offered a prayer for Arafat's well-being. Noting that Bethlehem is surrounded by Israeli troops, he asked how Christians could express love in such difficult times.

He called on Israel to change its policies, declaring that Palestinians want peace. "What is required is the stopping of violence and terrorism," he said, but added the burden is on the Israelis to ease tensions and move toward peace.

Arafat, a Muslim, had participated regularly in the Christmas festivities since 1995, the year Israel handed Bethlehem and most other West Bank towns to the nascent Palestinian Authority under interim peace accords.

But Arafat's control has gradually unraveled since violence erupted in Sept. 2000. Since then 2,005 people have been killed on the Palestinian side and 685 on the Israeli side.

The latest version of a U.S.-backed Mideast peace plan links Palestinian statehood to the Palestinians "acting decisively against terror," and calls on Palestinians to "immediately undertake an unconditional cessation of violence," according to a draft obtained by The Associated Press on Tuesday. Israel welcomed the changes to the plan, which is expected to be proposed in early 2003.

On Tuesday, Israeli soldiers on the Gaza Strip fired a tank shell at a group of Palestinians between the Karni and Erez crossings with Israel, killing a 15-year-old Palestinian and wounding three others, Palestinian hospital officials said. The military said soldiers identified suspicious figures digging near an unmanned army post and opened fire at them, assuming they were planting explosives.

Bethlehem Mayor Hanna Nasser said the best hope for ending the suffering on both sides was establishment of a Palestinian state.

"Our message to the world is to restore peace to the town of Bethlehem and all the Palestinian territories and to give the Palestinians a chance to live as real humans," he said. "We hope next year we'll have a better Christmas, and a real one."

The Associated Press contributed to this report.