BETHLEHEM, Occupied West Bank (AP) _ Pilgrims undeterred by heavy security and fear of terrorist attacks crowded a candle-lit grotto under a 4th-century church today to celebrate Christmas Eve at the site where tradition says Jesus was born.

Bethlehem, a city of 50,000 that is about 60 percent Moslem, also reverberated with the thump of drums and the shrill strains of bagpipes as young Arab scouts opened the official Christmas celebration with a parade through Manger Square.

The city was decked out with lights and streamers for festivities that also were to include a procession led by the Roman Catholic patriarch, a reception hosted by the Greek Orthodox mayor, Elias Freij, and a midnight Mass at the Roman Catholic Church of St. Catherine, adjacent to the Church of the Nativity.

Performances also were scheduled in Manger Square by 14 choirs from 11 countries, including the United States, Canada, South Africa and Fiji. Visitors were expected to include sailors from the U.S. 6th Fleet and soldiers from two Middle East peacekeeping forces, a multinational force in Egypt's Sinai Desert and the U.N. force in Lebanon.

But the number of pilgrims appeared to be far less than in previous years. Arab shopkeepers and some officials blamed the decline on a rash of terror attacks in and near the West Bank, and hijackings in the Middle East.

Bethlehem, a city overlooking the Judean hills whose name means ''house of bread'' in Jesus' language of Aramaic, is part of the territory Israel captured from Jordan in the 1967 Middle East war.

Israeli soldiers carrying automatic weapons kept watch over Manger Square from rooftops, while others used metal detectors to check visitors entering the Church of the Nativity which was built over the grotto said to be the site of Jesus' birth.

The pilgrims who came crowded into the grotto under the incense-filled Church of the Nativity, and many kneeled in front of a silver star which marks the spot where, according to tradition, Mary gave birth to Jesus.

Wanda Meixl, 54, of Milford, N.J., said she and her husband had come even though friends had warned them against it.

''Many people told us it might be dangerous here, but I said we're in God's hands,'' said Mrs. Meixl, interviewed in Manger Square after visiting the Church of the Nativity. ''I saw the spot where Jesus was born. For me it was very emotional. I was thrilled.''

Nadia Hanene, 38-year-old proprieter of a shop on Manger Square that sells olive wood souvenirs blamed the poor turnout on fear of terrorism.

''This is a poor Christmas. The only tourists who come buy postcards,'' she said. ''I think that since last summer's hijack (of a TWA jetliner) they are afraid.''

Antoinette Giataman, who runs The Holy Land Art Museum on Manger Square said Monday there were fears of terrorist attacks even among pilgrims who come. ''The people who come with guides don't stop here. The guides don't give the tourists a minute to look. They take them straight to the church,'' she said.

An Israeli tourism official, Haya Fisher, told The Associated Press that tourism was off about 20 percent, largely due to concern over a spate of attacks that have claimed the lives of at least 17 Israelis in and around the West Bank.

But Freij and Israeli Tourism Minister Avraham Sharir said they expected about 5,000 more pilgrims than in the previous year.

Some pilgrims who visited Bethlehem on Monday were disppointed to find the town of 50,000 so concerned with commerce. ''Coming into Bethlehem and seeing all the Santa Clauses along the road, it wasn't what I expected,'' said Manley Lokker, a student from San Francisco.

Tuesday's celebrations are the first of three Christmases for this city, although far fewer pilgrims attend the other two. On Jan. 7, the Greek Orthodox celebrate their Christmas, and the Armenian Orthodox have their celebration on Jan. 18.