Palestinian and Israeli security
officials discuss the hand over
Palestinian security forces were back on the streets of Bethlehem after Israel completed the handover.
Scores of police in dark-coloured uniforms took up positions in the city after a Palestinian flag-raising ceremony over the local security headquarters.
The Israeli army confirmed that the transfer of control had taken place.
The handover was largely symbolic since no Israeli troops or armour had been permanently based in the West Bank city in recent weeks.
Israeli military vehicles were seen leaving the city as part of a deal aimed at advancing the US-backed "road map".
But Palestinians in the city were sceptical over the scheduled withdrawal since Israel would maintain military checkpoints as well as a closure around Bethlehem, said our reporter.
"It is a ceremonial withdrawal, not a real one," said Bethlehem mayor Hanna Nasser.
The closure in Bethlehem has severely reduced tourism, the economic lifeline for the majority of Palestinians in the city considered the birth place of Jesus Christ.
Meanwhile, Israel was to release 21 Palestinian political prisoners on Wednesday, including an activist jailed in connection with the death of an Israeli minister.
A Palestinian security official said Haj Ismail Jabr, who is being held in connection with the death of Israeli Tourism Minister Rehavam Zeevi, would be among those released.
There was no immediate confirmation of the planned releases from the Israeli defence ministry.
Palestinian special forces prepare
to take over Bethlehem
Meanwhile, a source close to Sharon said Abbas had demanded Israel should allow Arafat, trapped for months in the West Bank city of Ram Allah, to move to Gaza City.
Sharon had said he was willing to allow Arafat to go to Gaza City, but would not guarantee the Palestinian leader’s right to travel freely, according to the source.
Abbas and Sharon held talks late on Tuesday to discuss the implementation of the US-backed “road map” aimed at ending the Palestinian-Israeli conflict.
“We have already said in the past that we are ready to let Arafat set himself up in Gaza City but he cannot travel between Gaza City and the West Bank,” said a high-ranking Israeli official.
Although Arafat is technically free to leave his offices, such a move could clear the way for Israel to arrest wanted Palestinians who have taken refuge with him.
In other developments, US officials announced a $30 million aide package for Palestinians to help restore public infrastructure in the occupied West Bank and Gaza Strip.
Regular Israeli incursions have destroyed much of the public works.