Israel kept Yasser Arafat away from Bethlehem's Christmas celebration for the first time in seven years, and residents of the birthplace of Jesus watched the annual Manger Square procession Monday with few pilgrims on hand and little joy in their hearts.

Scouts playing drums and bagpipes marched beneath Palestinian flags and posters of the absent Arafat, who has been restricted by Israel to the West Bank town of Ramallah since a series of Palestinian terror attacks in early December.

Addressing his people in a prerecorded speech broadcast on Palestinian TV, Arafat, a Muslim, said he spoke ``with a heart full of sadness.''

``The Israeli tanks, the barriers and the rifles of the oppressors have prevented me from sharing with you our annual celebration on this divine and blessed occasion,'' he said. ``The whole world that has seen what happened ... has to know what kind of terror the worshippers in this Holy Land are facing.''

On top of 15 months of conflict, crippling Israeli blockades and unrelenting tensions that have crushed Bethlehem's tourism-based economy, Arafat's absence lent a somber tone to this Christmas.

Unlike years past when pilgrims and choirs from all over the world flooded this biblical town, only local Christians gathered in Manger Square.

An empty chair in the front row, a black and white checkered keffiyeh headdress draped across it, symbolized Arafat's absence during the Midnight Mass at St. Catherine's Church next to the Church of the Nativity, which is built over the spot where tradition says Jesus was born. In front of the chair was a lectern, padded with gold upholstery, and a sign with Arafat's name.

Another empty chair was reserved for Bethlehem Mayor Hanna Nasser, who boycotted the service because Arafat was banned. The mayor called the travel restriction ``stupid (and) irresponsible.''

In his sermon during the Midnight Mass, Michel Sabbah, the Latin Patriarch of Jerusalem, criticized Israel for banning Arafat and charged that Israel accuses the Palestinians of terrorism to cover its own opposition to peace.

Palestinians ``are seeking neither killing nor hatred, but they are seeking their freedom,'' said Sabbah, the highest-ranking Roman Catholic cleric in the Holy Land and the first Palestinian to hold the post.

In a statement from Bethlehem, six Christian denominations appealed to the world community to intercede to ``put an end to the belligerency and arrogance of Israel and to compel its government to retract its despotic decisions.''

``I try to enjoy Christmas. Despite this, the Christmas spirit does not exist. Bethlehem is a big prison,'' said Richard Elias, 28, who carried his 4-year-old son, George, dressed in a Santa costume.

The square was almost devoid of decorations. A Christmas tree was decorated with one light and a few colored balls. A large banner read, ``Sharon assassinates the joy of Christmas,'' referring to Israeli Prime Minister Ariel Sharon.

``No business. No people,'' said Tony Michael, 60, standing with only a friend in his souvenir shop at the square. ``It's very bad in Bethlehem.''

Israel resisted strong European and U.S. pressure to rescind the travel ban. The Sharon government demanded that Arafat first arrest the assassins of an Israeli Cabinet minister, an ultimatum he appeared unlikely to satisfy.

Arafat had said he was determined to make the pilgrimage, as he had done every year since Bethlehem became an autonomous zone a few days before Christmas in 1995.

Belgian Ambassador Wilfred Geens noted Arafat is the only Muslim leader who attends Christmas Mass in a show of religious tolerance. Egypt's Foreign Minister Ahmed Maher said the ban challenged ``law, legitimacy, logic and international public opinion.''

Danny Ayalon, a top Sharon aide, said Israel was making a political statement. ``There is not any connection here to freedom of religion,'' he said.

He said that as Israel mourned dozens of ``innocent civilians who were brutally murdered by Palestinian terrorists ... I don't think we should go on with business as usual.''

Sharon spokesman Raanan Gissin said Israel demanded that Arafat arrest Israeli Tourism Minister Rehavam Zeevi's assassins from the Popular Front for the Liberation of Palestine, a radical PLO faction.

Israel also wants Arafat to arrest the two leaders of the group, Ahmed Saadat and Jihad Ghoulmi, who are suspected of planning another suicide attack, he said. ``Arafat knows exactly where they are. Yet he has not arrested them,'' Gissin said

Despite the tensions, Israeli Defense Minister Binyamin Ben-Eliezer announced the easing of security restrictions in Bethlehem over the next few days to allow Christians access to the Bethlehem shrines.

During the Palestinians' uprising, Israel has enforced stringent restrictions on travel. The restrictions were tightened earlier this month after attacks by Palestinian militants killed 37 Israelis.

On Dec. 15, Arafat went on television to order a halt to all violence against Israel, and the number of attacks has dropped sharply.

However, a Jewish settler was seriously wounded Monday in a shooting attack near a settlement in the northern West Bank. One of the three assailants was killed when the Israeli returned fire. It was the first successful attack on Israelis in about a week.

A caller to The Associated Press said the attack was carried out by the al-Aqsa Brigades, a militia associated with Arafat's Fatah, as revenge for the travel ban on Arafat.

Since Arafat's speech, a crackdown by Palestinian security forces on militants has resulted in some of the worst Palestinian infighting in years.

In all, violence that broke out in September 2000 has killed 849 people on the Palestinian side and 242 people on the Israeli side.