At Midnight Mass in St Catherine's Roman Catholic Church, the senior Roman Catholic clergyman in the Holy Land, Latin Patriarch Michel Sabbah, addressed an absent guest - Yasser Arafat.

Speaking to the front row, draped in a black and white keffiyeh and marked with a placard reading: "His Excellency Yasser Arafat, President of the State of Palestine," Bishop Sabbah condemned what he called "a political decision, despite our prayers tonight".

The decision that barred Mr Arafat, a muslim, from attending the Mass, as he had every year since 1995, was taken by the Israeli Prime Minister Ariel Sharon.

When Mr Sharon announced last week that he would not allow Mr Arafat to go to Bethlehem, everyone from the Vatican to the Israeli President Moshe Katsav intervened.

It has meant a public relations victory for Mr Arafat at a time when the European Union was criticising him for his apparent inability to stop operations against Israel.

The empty chair in Bethlehem won a degree of European sympathy for Mr Arafat and the Palestinian cause. However, the controversy overshadowed Christmas itself in Bethlehem.

During the hours of carols that preceded Mass in St Catherine's Catholic Church, celebrants watched expectantly to see whether the next arrival was the familiar form of Mr Arafat himself.

There were rumours that he would slip through Israeli lines as he used to while a young commando leader in the late 1960s, to appear in the church at midnight.

Mr Arafat had promised to walk the 18 miles from his besieged Ramallah headquarters to Bethlehem to take his place in the church.

In a late-night televised address to the Palestinian people, Mr Arafat conceded he would be unlikely to elude Sharon: "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."

Israeli security restrictions, begun in October last year at the beginning of the latest Palestinian uprising, prevented thousands of Palestinian Christians from elsewhere in the West Bank from attending Bethlehem's traditional celebrations.

"It's only the locals from Bethlehem who are here," said one Palestinian woman in Manger Square. "Even from the villages around here, people were not allowed to come."

Although most hotels had closed since Israeli forces damaged them last month, there were still more empty rooms than guests at the city's inns and hostels that were open.

Foreigners, apart from diplomats and aid workers, stayed away from a city that in recent years had hosted tens of thousands of pilgrims and overseas choirs.

One Israeli daily newspaper estimated that only 5,000 people were in Manger Square for the singing, where there were almost 10 times as many in 1999.

As sombre as the mood in Bethlehem was, this was one of the first times since Israeli tanks entered the city and destroyed several buildings last month that people had ventured out of doors at night.

In Manger Square Palestinian Christians sang carols in English and Arabic. Yet many seemed to agree with the words of a banner that read: "Sharon assassinates the joy of Christmas."

Anders Liden, Sweden's ambassador to Tel Aviv, who represented his country at the Bethlehem Mass, said EU diplomats had worked hard for days to persuade Mr Sharon to allow Mr Arafat to attend. Their failure, he said, was bad for Israel.

This view was echoed by the Israeli Chief Rabbi Yisrael Meir Lau. He said: "It has given Mr Arafat a public relations coup, and on the religious issue."

Israeli officials, at least those who defended Mr Sharon's decision, emphasised that the prime minister was not interfering with rights of religious worship.

They insisted that Mr Arafat must arrest more of those involved in the assassination of Israeli tourism minister Rehavam Zeevi before he would be allowed to go anywhere.