Arafat had repeatedly vowed to attend Midnight Mass in the town where Jesus was born, despite Israeli tanks that have surrounded his headquarters in the West Bank city of Ramallah for two weeks.
On Saturday, he began a war of nerves by declaring, "I will go there [Bethlehem] by foot if necessary."
But later on Saturday, Israel's defense Cabinet reiterated a policy that Arafat not be allowed to leave Ramallah until he arrests four terrorists from the Popular Front for the Liberation of Palestine near him in Ramallah.
Israeli intelligence identified the four as Hamdi Kuran and Basel al-Asmar, the gunmen who killed Israeli Tourism Minister Rechavam Zeevi in October, and their commanders, Ahmed Sadat and Jihad Ulee.
Early yesterday, Palestinian Information Minister Yasser Abed Rabbo insisted Arafat would attend services at Bethlehem's Church of the Nativity, despite the Israeli policy.
Rabbo quoted the PLO leader as telling a group of Christians visiting Ramallah, "See you in Bethlehem tonight."
Arafat also urged foreign leaders to pressure Israeli Prime Minister Ariel Sharon to free him for the night.
Israeli government officials, including President Moshe Katzav and Foreign Minister Shimon Peres, also pressed Sharon, saying the blocking of Arafat was bad for Israel's image abroad.
Sharon replied, "This is not about p.r. This is about law and order."
Israel intensified its surveillance of Arafat -- and intelligence officers learned that he planned to leave Ramallah in the car of Michel Sabbah, Latin Patriarch of Jerusalem, who planned to lead a delegation of religious figures to Bethlehem.
But before the patriarch arrived, Israeli media reported that the plan would be foiled because the car would be examined when it reached a checkpoint leading from Ramallah.
Arafat apparently backed down at that point, and no attempt was made to sneak into Bethlehem.
The patriarch's car, which is usually immune from inspection, was thoroughly searched - even the baggage compartment, officials said.
Arafat put on a good face, telling reporters, "Nobody can humiliate the Palestinians."
He spoke to a crowd in Bethlehem's Manger Square by telephone.
Arafat pointed out he had missed Christmas in Bethlehem for the first time since it came under Palestinian control in 1995.
"The location where Jesus was born is under siege from all sides," he said.