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BETHLEHEM MOOD SHOWS EFFECTS OF PEACE TALKS

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Thousands of pilgrims streamed into the town of Bethlehem in the occupied West Bank Saturday to celebrate Christmas at the birthplace of Jesus.

The mood reflected changes brought about by Middle East peace talks as tourists from Jordan, which ended a 46-year formal state of war with Israel with an October peace treaty, arrived under once-outlawed Palestinian flags and pictures of PLO leader Yasser Arafat.Residents said the atmosphere in Bethlehem's Manger Square was the most festive since the Palestinian uprising launched in 1987 cast gloom over the town's Christmas celebrations.

A crowd estimated at more than 10,000 thronged the town, a sharp increase from past years. Marching bands played Christmas carols and fireworks lit the cold, clear night sky, illuminating a skyline of church spires and festive decorations.

A small group of tourists from Hong Kong huddled in a corner of the packed square, singing "Silent Night" in Chinese. Near them, Scotsmen milled about in kilts.

Vendors grilled meat over open coals and sold hot pudding from brass containers.

"It's more beautiful than last year. It's more beautiful every year and God willing it will be even more beautiful next year," said a 30-year-old Palestinian.

But a sobering note was cast by the hundreds of Israeli soldiers armed with assault rifles watching from rooftops and street corners.

Under the Israel-Palestine Liberation Organization peace deal, the Israeli army should have pulled out of Palestinian centers in the West Bank by last July.

The withdrawal, the planned prelude to Palestinian elections in the next main phase of the accord, has been delayed by Israeli security concerns amid a surge of attacks by Muslim guerrillas opposed to the peace deal.

Israeli officials have said Bethlehem is likely to be one of the first towns handed over to the PLO if a phased pullout is agreed. The army withdrew from Gaza and Jericho in May.