Nazareth is the city where, in Christian tradition, the angel Gabriel announced to the Virgin Mary that she had been chosen by God to bear the child Jesus. The event is commemorated by the Church of the Annunciation.

The city has been turned into one large building site in preparation for the expected visitors. Hotels are being thrown up, old houses renovated. The streets are clogged with builders' lorries, and bricklayers and masons are never out of work.

But a heavy cloud lies over the whole project, after one detail of it sparked a territorial dispute with the city's Muslims.

The Christian mayor, Ramiz Jeraisi, submitted a plan to clear an open space close to the Church of the Annunciation, in order to accommodate theexpected throngs of pilgrims. The area, about 2,000 square meters (more than 20,000 square feet), dominated by a tall eucalyptus, forms a triangle between two streets and a small alley separating it from the church itself.

But the city's Muslims claim that they own the land, which houses the tomb of a revered local figure, Shihab al-Din, and have announced that they intend to build a mosque dedicated to him on the site.

They have already erected tents there with a number of loudspeakers, and every Friday hundreds of Muslims gather under them to pray. A sign at the entrance to the site shows a picture of the planned mosque, with four minarets.

Israeli Public Security Minister Shlomo Ben Ami has proposed a compromise solution. He suggests that the Muslims could be allowed to erect a small mosque on part of the site, while the rest would be left for use by the church. So far, there have been no takers.

"The biggest loser here is Nazareth, because the dispute could have negative fallout for the pilgrims.Travel agents might well take the town off their itinerary," the town's bishop, Giacinto Boulos Marcuzzo, told AFP.

Tension has reached such a point that Christian leaders have threatened to close down holy sites in Israel at Christmas and there have been rumours that Pope John Paul II could cancel his planned 2000 visit to the city.

The Haaretz newspaper said in a front-page report Wednesday that if the churches carry out the threat they could seriously undermine Israel's image among hundreds of millions of Christians at the height of the millennial celebrations.

However Marcuzzo dismissed fears that the Pope could change his mind. "I don't thing this affair will call the Pope's visit into question," he said.

"The problem is not that the Christian community is rejecting a new mosque. But one group wanted to fabricate a crisis, not for religious, but for political reasons," he said.

A leading Arab Christian priest, Emile Shufani, was fiercely critical at what he called "attempts toIslamise the city." "For eight years the Islamist movement, manipulated by the Muslim Brotherhood which is originally from Egypt, have been trying to put down roots here. As far as we are concerned, there is no question of making a compromise, because that will just make these groups strong everywhere in the country tomorrow," he said, adding, "This business has set back cohabitation between Christians and Muslims here by 50 years".

"The whole affair has got out of hand," said Mohammed Zidan, chairman of the regional Association of Arab Mayors. "It is becoming a problem not just for Nazareth, but for the whole Muslim population of the region," he said. "It has got to the point where it will be impossible to solve the question without building a mosque," he added.