The barrier will eventually ring Bethlehem on three sides and slice off about 2000 hectares of farmland, Mayor Hanna Nasir said. Maps provided by Israeli authorities confirmed his description.
"This wall will stop all kinds of natural growth," Nasir said, noting that 70% of the work force depend on tourism. "This is a serious blow to the future of Bethlehem."
Israel's Supreme Court is weighing whether to approve one controversial section, which would ring at least five Bethlehem homes, requiring Palestinian residents to apply for Israeli permits to enter and leave the enclave.
In another sector, 26 homes are surrounded by fences with electronic sensors and residents fear they will be cut off from Bethlehem, or forced to move.
In Qalqiliya, a West Bank town already enclosed, thousands of residents fled because of growing unemployment.
Israel says it needs the barrier "for security reasons".
"If they (Israelis) want to feel safe, they should withdraw from occupied territory," said the Bethlehem mayor.
The entire separation barrier will eventually run up to 680km, from north to south on the edges of the West Bank; about one-third has already been built, disrupting the lives of thousands of Palestinians.
In Bethlehem, Israel has so far built more than eight kilometres of a planned 25km barrier around the town and its suburbs - which has a population of about 140,000. The Bethlehem loop is to have a gap in the southeast, the area farthest from Jerusalem.
The barrier adds to the struggles
imposed by Israeli occupation
Once the barrier is completed, Bethlehem residents with jobs in Jerusalem - about 30% of the work force - will have to pass through the Israeli checkpoint at the entrance to town.
For now, most workers bypass the checkpoint, some because they do not have permits to enter Jerusalem, others to cut down on waiting time.
Nawal Shuaibat, 45, a math teacher at an Arab school in Jerusalem, has no permit and takes a back road to work. "I don't sleep at night. I can't stop thinking about how I'm going to feed my kids once this path is closed off," said Shuaibat, a mother of four. Her husband, who used to carve olive wood souvenirs, is out of work because there are few tourists.
On the north side of Bethlehem, nearest to Jerusalem, curious nuns from a nearby monastery took pictures as cranes lined up eight-meter-high cement slabs to form a wall already several hundred metres long.
"I don't sleep at night. I can't stop thinking about how I'm going to feed my kids once this path is closed off"
"With this wall, there will be no freedom. There is a feeling of being in a prison," said Sylvia Melato, a Roman Catholic nun.
The barrier will come within two kilometres of the Church of the Nativity, built over a grotto where tradition says Jesus was born.
Ata Allah Hanna, spokesman for the Greek Orthodox Patriarchate in Jerusalem, said some of the land expropriated for the barrier belonged to his church. Israeli officials said they were in "advanced negotiations" to find a solution to the church's complaint.
Hanna said the barrier would complicate travel between the Church of the Nativity in Bethlehem and the Church of the Holy Sepulchre in Jerusalem - two of Christianity's holiest sites.
Barrier will affect travel between
Bethlehem and Jerusalem
Israel's travel restrictions, imposed at the outbreak of the Intifida (uprising) in September 2000, have often affected tourists and pilgrims, with tour groups not allowed to enter Bethlehem during tense times.
Bethlehem's municipality appealed to Israel's Supreme Court against a 3km section of the wall that would branch off the main route and wrap around Rachel's Tomb.
Israel maintained control of an enclave around the Biblical matriarch's tomb after withdrawing from Bethlehem in 1995 under interim peace deals with the Palestinians.
Israel says it needs to control the enclave because the Palestinians have not kept promises to safeguard it. The Palestinians say Israel is simply grabbing a chunk of Bethlehem.
The loop around the tomb will enclose at least five nearby Palestinian homes and residents will be required to obtain permits to leave and enter.
Palestinians will need permission
to enter and leave certain areas
Another area of friction is a hilltop on Bethlehem's eastern outskirts where 26 houses are almost entirely ringed by fences with electronic sensors.
Israeli soldiers patrol the barrier, and all around the homes are red signs that say "mortal danger (to) anyone who passes or damages the fence."
One resident, Sulayman Zawahrah, 48, said the Israeli military offered homeowners compensation for moving into town. The families refused, he said.
Rachel Naidek-Ashkenazi, a spokeswoman for the Israeli Defence Ministry, said "there is no intention to evacuate" the homeowners.
"They put it (the barrier) mainly to prevent farmers from their land, people from their jobs, and to separate families, all with the final goal of forcing Palestinians to flee"
The hilltop residents still have access to Bethlehem through a small dirt road, but Zawahrah said he was told by the army the barrier would eventually block that route, too.
Bethlehem farmer Khadir Jrashe said he lost 100 acres (40 hectares) to the barrier. "They put it mainly to prevent farmers from their land, people from their jobs, and to separate families, all with the final goal of forcing Palestinians to flee," he said.