Christmas rites in the town of Christ's birth, including an internationally televised midnight mass and a colorful procession, took on special significance this year as Israeli and Egyptian leaders prepared to talk peace on Christmas Day.

"This is usually a time for peace, love and giving gifts, and not for disappointment," said Mayor Elias Friej in an interview.

But as a reminder that violence is still very much a part of the Middle East, an explosion apparently triggered by Arab guerrillas rocked Manger Square and startled thousands of pilgrims today. No one was hurt.

The blast went off just hours before the start of midnight mass at the nearby St. Catherine's Basilica and marred the atmosphere of joy. It was the first guerrilla-related incident during Christmas festivities in Bethlehem in more than 10 years of Israeli occupation.

Witnesses said that the explosion, caused by either a hand grenade or a small time bomb, occurred on steps leading down from a private house just uphill from the square.

It was a relatively small charge, police said, but the sound was magnified by stone building surrounding the site, startling the crowd of 15,000 that packed the square awaiting the start of midnight services.

Authorities closed off the area and started a search for the bombers.

The Roman Catholic patriarch of Jerusalem, Msgr. Giacomo Giuseppi Beltritti, was to celebrate pontifical high mass as Christmas Day began. Equipment stood ready to beam the ceremony by satellite around the world and by closed circuit to the crowd in Manger Square.

Many of the pilgrims will be saying prayers for peace on Christmas Day as Israeli Prime Minister Menachem Begin and Egyptian President Anwar Sadat meet in Egypt to talk over ways of ending 30 years of war.

"I hope Sadat and Menahem finish the problem," said a 13-year-old Christian Arab.

But many Palestinians, believing that Sadat is operating behind their backs, hope the talks fail.