Israel says all its military activity in the West Bank is determined by security
The UN has accused Israel of restricting development of the Bethlehem region in the West Bank.
The UN Office for the Coordination of Humanitarian Affairs (Ocha) said just 13% of land around Bethlehem was open for use by the Palestinian population.
It said the birthplace of Jesus Christ was hemmed in by Israeli settlements and military zones as well as Israel's West Bank barrier.
An Israeli foreign ministry official said the issue was beyond Ocha's remit.
Pope Benedict is due to celebrate Mass in Bethlehem
, a Palestinian governorate which is home to 175,000 inhabitants, including many Christians.
Two-thirds of the governorate's 660 sq km (255 sq miles) has been under Israeli control and about 86,000 Israelis live in settlements and outposts in the governorate, Ocha says.
occupied the West Bank in the 1967 war and its
is regarded as illegal under international law, although Israel disputes this.
"Israeli measures have radically reduced the space available to the inhabitants of Bethlehem, compromising the future economic and social development of the governorate," the Ocha report says.
The report says that in addition to the land put under Israeli control under past interim agreements between Israel and the Palestine Liberation Organisation (PLO), 20% of the remainder is an Israeli-controlled "nature reserve".
The UN says Israel's West Bank barrier cuts Bethlehem off from its hinterland
Meanwhile, the West Bank barrier cuts through Bethlehem's western edges blocking off grazing and agricultural land, the report says.
"As a result, Bethlehem's potential for residential and industrial expansion and development has been reduced, as well as its access to natural resources," the report said.
Israel says the barrier is needed to keep out Palestinian attackers, including suicide bombers. Palestinians call it a land grab since it juts into the West Bank.
Yigal Palmor of the Israeli foreign ministry said he had not seen the report but accused past reports by the Office for the Coordination of Humanitarian Affairs of containing "distorted information".
Separately, information released by an Israeli anti-settlement group, Yesh Din, said settlement activity in the West Bank had been accelerating at the fastest rate since 2003.
It cited more than 20 cases of new Israeli building on occupied territory since January, on both sides of the barrier, including a number of outposts built without Israeli permits.
Former Israeli Prime Minister Ariel Sharon promised the previous US administration that he would evacuate all unauthorised outposts built after March 2001, but critics say evacuations are carried out intermittently and without rigour.
The international peace plan known as the road map called on Israel to halt all construction in the settlements, although observers say construction has never ceased.
Israel says it is not building new settlements, but claims the right to foster "natural growth" within the confines of existing communities.