While Bethlehem's souq is alot smaller than Jerusalem's, it is much less touristy and the sellers are less aggressive and very friendly, many even offer potential customers coffee and tea. The Palestinian Authority doesn't charge a sales tax, so Bethlehem's shopkeepers charge much less for souvenirs. Bethlehem is a perfect place to practice those bargining skills that you were hoping to try out!!
In peaceful times, Bethlehem's traders do a roaring trade in souvenirs for pilgrims to the town. In the current situation, the tour operators prefer to quickly hustle their guided groups in and out of the Nativity Church without allowing them time to look around Manger Square. Often, at the end of the tour, they will take their groups to a pre-selected souvenir shop and charge the owner of the shop a big commission for the sales made to the tour group. That means most smaller souvenir shops here are blessedly free from pilgrims, and also that the smaller shops are in desperate need of business. They remain, however, substantially less aggressive than Jerusalem's sellers. Souvenir shops in Bethlehem are much, much cheaper than in Jerusalem- with all the same selection surprisingly, many Bethlehem souvenir shops even have Jewish themed souvenirs. One must venture out of Manger square to the souvenir shops on Manger Street and also in the market place beside Manger Square past the Mosque of Omar. The smaller looking souvenir shops offer the best deals and very friendly service. Bethlehem is an awesome place to get all your Holy Land souvenirs for much, much cheaper than you would get them in Israel. If a price is listed in USD, it's a hiked price for tourists, so don't hesitate to bargin for a much lower price you will almost always get a lower price if you ask for it.
You must visit the Milk Grotto Church which is two minutes away from the Nativity Church. On your way up there, look for an Olive Wood factory located on the Milk Grotto Street, with the name Christmas House Olive Wood Factory (http://www.mychristmashou...). The guys there can provide you with an amazing tour of their workshop and you can see how they hand carve things from the olive trees, a must see. Very friendly Christian family, and they also have a gift shop, where you can find really unique gifts. Also they have another gift shop right in the manger square next to the peace center building.
Just off Manger Square on Milk Grotto Street there are a number of souvenir shops selling various religious gifts and Bethlehem's famous olive wood carvings.I found the Tabash Nativity Store friendly, not pushy, and willing to give discounts. They will also offer you a free Turkish coffee.
Visit one of Bethlehem's four refugee camps for traditional Palestinian handicrafts, handmade olive oil soap, and beautiful embroidery.
Christian Gifts Shop
Sells christian souvenirs, piece of Bethlehem to share with your family and friends. Many items in store with world wide delivery option.