A Palestinian flag flying outside city hall today darkened an atmosphere of good will over Bethlehem's first official celebration of Christmas in six years.

"We thought this year is a special year because of the peace agreement, so we decided to put up the Palestinian flag," said Jamal Salman, secretary of the Bethlehem municipality.He said Israel's army called and ordered it down immediately, but the longtime mayor of this Arab city, Elias Freij, was negotiating to try to keep the flag up.

Rumors swept Bethlehem that the official Christmas celebrations would be canceled because of the dispute, but Salman said they would proceed whether the flag came down or not.

The birthplace of Jesus is having its first official celebrations since Christmas 1986, after which the holiday became a protest day in support of the uprising against Israel's occupation of the West Bank and Gaza Strip.

Flying Palestinian flags was grounds for arrest before the Israel-PLO autonomy accord was signed Sept. 13, and the Israeli military authorities that run the West Bank said the ban remained for public institutions.

"Yes, there is a declaration of principles between the PLO and Israel, but the area is still under the control of the military governor," said Maj. Elise Shazar, spokeswoman for the military.

Meanwhile, the Palestine Liberation Organization tested its wings as a government in waiting by declaring Christmas a national holiday for both Christians and Muslims throughout the occupied lands.

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The declaration was a stretch because Palestinians are to get limited self-rule only in the Gaza Strip and the West Bank town of Jericho, which does not include Bethlehem.

"We the sons of the national movements decided to transform this occasion into an extraordinary national event," said a statement from PLO's mainstream Fatah and two other factions. "We call on boy scouts to raise Palestinian flags and to play national music to make the festivities a symbol for our struggle for independence."

Opponents of the autonomy pact did not sign the statement.

Shopkeepers in Bethlehem observed a general strike today called by Hamas, a militant Islamic movement that opposes the accord.

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