On a rocky hilltop in the heart of the West Bank is Bethlehem, birth place of Christianity. Viewed from a distance, the dusty landscape, carpeted in traditional honey-coloured Palestinian houses, poplar and olive trees, is familiar from Christmas cards.

The city, represented in nativity plays in primary schools across the West, is heavily scarred by war wounds. It is a place traditionally associated with peace, hope and innocence, although its history has been a long and bloody one.

In the town's central square is The Church of the Nativity, built to commemorate the birth of Bethlehem’s most famous citizen.

Since its conversion to Christianity, the site has borne witness to many battles - it was spared during the Sassanian invasion of 614, survived the growing conflict between Oriental and Occidental Churches after the Schism of 1054 and was especially honoured by the Crusaders.

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In 2002, the church was besieged by Israeli soldiers for over five weeks. Over 200 Palestinian militants, civilians and church clerics were trapped inside; by the end of the siege ten people, including the church bell-ringer, had been killed.

When I visited the church was eerily empty. The main hall is almost stark in its simplicity (largely due to the number of times it's been ransacked), with rough paving slabs and – in the centre – wooden floorboards stripped back to reveal a fourth-century mosaic. Red and gold, bauble-like candle-holders dangle from the ceiling and glint in the faint light.

This austere setting seems a fitting tribute to the humility we hear of in stories of Jesus’ birth. However, it provides a dramatic contrast with the kitschly named streets outside (Manger Square, Manger Street, Star Street) and the touristy Tomb of the Holy Sepulchre in Bethlehem’s sister-city, Jerusalem.

Downstairs from the central nave, in the candle-lit crypt, a 14-pointed silver star marks the spot hallowed as the actual site of Jesus’ birth. Our guide explains that all traditional Palestinian homes were built over a natural cave, which was used for sheltering the household’s animals.

It is likely that Mary and Joseph, forced to travel from their home in Nazareth, would actually have had relatives to stay with in Bethlehem. However, Ancient Judaism decreed that a woman who has just given birth is a polluting presence, which could further explain why Mary would have felt there was ‘no room’ for her at the inn or elsewhere.

The Milk Grotto, to one side of the basilica, is a cave of white stone that now houses a Franciscan chapel. According to legend, Mary and Joseph stopped here en route to Egypt so that Mary could feed her new baby. It was drops of milk from the Virgin’s breast that were said to turn the red stone of the cave white, and the site is sacred to both Palestinian Muslims and Christians.

In particular, it is visited by women with fertility problems or those who are unable to breast-feed. It is a perfect example of how much the two faiths have in common – a useful thing to remember at a time when the extremists on both sides are keen only to emphasise the differences.

In a display of co-existence and compromise the church and grotto are now shared between the Greek Orthodox, Armenian and Catholic communities. The status quo regarding who controls what (opening hours and feast days), was installed by the Sultan of Istanbul in 1847. Co-operation between the religions is never more obvious than this week, when the church is host to three separate Christmas celebrations.

Bethlehem is experiencing once of its rare periods of popularity and is packed with tourists – mainly Indians and Eastern Europeans. But Bethlehem has a limited appeal as a holiday destination thanks to frequent checkpoints, economic hardship and the wall that now surrounds the city, cutting it off from much of its land.

However, the nearby town of Beit Sahour is an ideal place to get a sense of historical Palestine, since much of the traditional architecture has been renovated. There is a host of cafes and restaurants serving traditional Palestinian food, all filled – during more peaceful times – with Palestinian families.

Palestinians and liberal Israelis are keen to show visitors beyond the Western images of mangers, shepherds and a sleepy peaceful town. The many instances, ancient and modern, of coexistence among the inhabitants of the Holy Land - secular, Jewish, Christian and Muslim - could be a model for peace worldwide.

And the many peace activists from both sides of the conflict who work for understanding and reconciliation are further corroboration of this. Let's hope that 2008 brings all the people of Bethlehem a little closer to peace.

Need to know

Getting there: Alitalia flies to Tel Aviv from Heathrow (via Italian cities) from £270. British Airways flies direct to Tel Aviv from Heathrow from £330. (Prices are higher around Christmas.) Alternatively, you can fly to Amman in Jordan and travel on to the West Bank from there. BMI flies from Heathrow to Amman from £430.

Accommodation: The Sahara Hotel in Beit Sahour (tel. +972 2 277 2428; sahara.hotel@yahoo.com) offers an intimate insight into this fascinating town. The accommodation could not be described as luxurious but the food here is good, the atmosphere cosy and welcoming. A double room, with breakfast and dinner included is £12 per night, with a £6 single supplement. Or try Shepherd Hotel (00 970 2 274 0656, info@shepherdhotel.com).

Eating: The restaurant at Shepherd’s Valley Tourist centre in Beit Sahour, while obviously geared up for tourists, is popular with local families too. Traditional Palestinian food is served at low tables surrounded by couches, beneath huge marquees while nariglehs (water pipes) are passed around. The centre also has a campsite where cheap accommodation is readily available for £7 per night.