''We are waiting,'' says Shabib, a member of the Palestinian tourist police, his navy uniform immaculate and his trousers creased. ''We are waiting, and we are hopeful.''

Two weeks ago, Israeli forces pulled out of Bethlehem, turning it back over to Palestinian police. That was part of the planned withdrawal from occupied cities and towns called for in the U.S.-brokered ''road map'' to peace. It was the second handover of territory to the Palestinians that has accompanied the hudna, the temporary cease-fire declared in early June by militant groups responsible for attacks that have killed more than 800 Israelis in the past 33 months.

Although Bethlehem has been restored to Palestinians, most here -- as elsewhere in the West Bank and Gaza -- say so far they see no improvement in their lives as a result of the negotiations for peace with Israel. The truce, meanwhile, has brought a reprieve for Israelis, who are venturing out to restaurants and onto streets again to take advantage of the three-month cease-fire.

''The Israelis are harvesting the fruits of the hudna,'' says Hatem Abdel Qader, a member of the Palestinian Legislative Council, who supports the truce. ''We are still waiting.''

For Palestinians, whose economy has suffered badly in the past three years, the truce has provided a few tantalizing hints of what peace could bring. ''Something unusual happened the other day,'' says an astonished Imad Muna, who runs the Educational Bookshop in Arab East Jerusalem and whose clientele once was largely Jewish. ''Two Israelis came in. It has been more than two years since any have been here. It has to be the hudna.''

Palestinian Prime Minister Mahmoud Abbas is under pressure to show immediate results of his negotiations with Israeli Prime Minister Ariel Sharon (news - web sites). Abbas has been pushing for wide-scale release of the thousands of Palestinians held in Israeli jails (about 300 have been freed) and has been pressing Israel to halt construction of a security wall that would seal Palestinians to 45% of the West Bank. The wall is intended to keep terrorists out.

While Israeli troops withdrew from Bethlehem and Gaza last week and are expected soon to pull out of Jenin, Palestinian officials say Israel hasn't done enough to satisfy the initial requirements of the road map: withdrawing more troops, dismantling more Israeli settlements in Palestinian territory and allowing Palestinians greater freedom of movement.

Qader and others say more immediate steps are needed for a fast morale boost. One example: reducing or removing the 166 Israeli checkpoints and 320 roadblocks (according to Palestinian estimates) that confine Palestinians to their own cities.

In an effort to create some visible rewards and shore up support for the new prime minister, the United States is funneling $20 million in aid directly to Abbas. The funds are supposed to be used immediately to rebuild roads, sewers and other Palestinian infrastructure.

In the Palestinian territories, however, there are few signs that the cease-fire has done much more than raise meager hope.

''Sure, they are out of our town, but now we are surrounded,'' says Bashir Handal, 47, who owns a toy and gift shop off Manger Square here. The network of roadblocks and checkpoints set up around Bethlehem is as dense as ever, Handal says, making obtaining merchandise a cumbersome and costly ordeal. Like many who live here, he can't leave the town because he doesn't have the proper identification card to travel.

''Nothing has changed,'' Handal says. Before the intifada -- the Palestinian uprising that began in September 2000 after talks aimed at creating a Palestinian state failed -- as many as 5,000 tourists a day came to visit the town considered the birthplace of Jesus. The Israeli army has moved forces in and out of Bethlehem four times in the past three years. Last May, Palestinian militants took refuge in the Church of the Nativity, built on the site where the New Testament says Jesus was born. Israeli forces camped outside, and the bloody standoff lasted a month before a solution was negotiated.

Earlier this week, Israel announced that some tour buses would be allowed into the city. So far, none has come. Mayor Hanna Nasser has had the rubble and ruin cleared away, and the bomb and bullet damage has been repaired. If the cease-fire holds, Nasser believes Bethlehem may soon reclaim its importance as a tourist center. In the meantime, he says, he is waiting.

A handful of terrorist incidents have marred the cease-fire. But the truce, set to end in late September, has not been sabotaged.

Buoyed by the cease-fire, some Israeli businesses have dismissed the armed security guards that have been posted outside virtually every restaurant in the country to deter suicide bombers. In the two weeks since the truce began, downtown Jerusalem has regained much of the nightlife that made it such a vibrant city before its streets were nearly emptied because of suicide bombings. ''We've just been packed,'' says a waitress at Shonka, a popular restaurant known for its modern cuisine. ''It's the hudna, what else?''

While Israelis may see more firsthand impact of the cease-fire than the Palestinians, they, too, are waiting. ''To have peace and tranquility for three months is a wonderful thing, and we are going to take advantage of it,'' says a relaxed Robby Leon, a business manager out for dinner with his girlfriend. ''But for all of us, the question is, 'What begins then?' ''