Pilgrims have been tempted back by a drop in Israeli-Palestinian violence
Officials in Bethlehem say it has received more visitors this year than since 2000, when Palestinians began an uprising against Israeli occupation.
The Palestinian Authority said more than one million people had visited the West Bank town - 40,000 this week.
Christian pilgrims have been gathering to celebrate Christmas at what they believe to be the birthplace of Jesus.
Violence may be down, but tourists must still cross Israel's separation barrier to enter Bethlehem.
The barrier, most of which is fencing but which around Bethlehem is a high concrete wall, surrounds the town on three sides.
Australian pilgrim Sean Wright, 30, said he had travelled to Bethlehem to celebrate Midnight Mass in Manger Square.
"As Roman Catholics, it's an important tradition for us. And we will pray for peace in the Middle East," he said.
"It was heartbreaking to see that wall, it's a blot on Israel," his 22-year-old girlfriend Jessica Kelly told the AFP news agency.
Israel says the separation barrier, which snakes in and around the West Bank, surrounding many Palestinian towns and villages, is necessary for security. But Palestinians see it as a way for Israel to seize land that belongs to them.
Correspondents say the tourist boom in Bethlehem is a welcome respite for an area badly hit by Israeli restrictions on movement of goods and people.
Visitor numbers to Bethlehem this year have been more than double the number in 2007.
Festivities on 24 December, when most Christian churches mark Christmas Eve, are expected to last late into the night.
Among thousands who have reached the town is the BBC's Aleem Maqbool, who has made the trek on foot in the last 10 days from the traditional home of the Virgin Mary in Nazareth.