The local economy is battered, with the highest unemployment in the West Bank, and local Christians continue to leave Bethlehem, which years ago moved from a Christian majority to a Muslim one. But Baboun is trying to raise hope, pointing to the Palestinans' recent boost of status at the United Nations.
"We still have a long way to go, but the Christmas season is special this year because not only do we celebrate the birth of Christ, but we are celebrating the birth of the Palestinian state," Baboun said, standing next to a 55-foot Christmas tree. "It is a Christmas of peace, of hope and love."
The United Nations General Assembly's vote last month to upgrade the Palestinians' status to that of a nonmember observer state set off celebrations across the West Bank.
The move changed little on the ground, with Israel opposing the U.N. recognition bid and saying it bypassed peace negotiations aimed at establishing a state.
Bethlehem, like the rest of the West Bank, fell onto hard times after the violent Palestinian uprising against Israel broke out in late 2000, frightening tourists and pilgrims away. As the fighting has subsided in recent years, the tourists have returned in larger numbers. Last year's Christmas Eve celebration produced the highest turnout in more than a decade, with some 100,000 visitors, including foreigners and Arab Christians from Israel, reaching Bethlehem.
The Israeli Tourism Ministry said it expects 75,000 tourists to arrive for Christmas this year, citing last month's clash between Israel and Palestinian militants in Gaza as a reason for the drop. It said there was a 12 percent decrease overall in incoming tourism to Israel last month. Foreign tourists heading to Bethlehem must pass through Israel or the Israel-controlled border crossing from Jordan.
Bethlehem officials say all 34 hotels in the town are fully booked for the Christmas season, including 13 new ones built this year.
About 22,000 Palestinians live in Bethlehem, according to the town council.
Israel turned control of Bethlehem over to the Palestinian Authority a few days before Christmas in 1995, and since then it has become an independence celebration for local Palestinians, as well as a religious holiday for Christians. The square is filled with a mix of tourists, pilgrims and young Palestinians, making it hard to determine how many tourists are there.
The Christmas season is the mainstay of Bethlehem's economy. When tourism lags because of politics or violence, the town lurches into depression.
Baboun hopes to revitalize her town's depressed economy through tourism. She said Bethlehem has the highest unemployment rate in the West Bank, at around 20 percent. U.N. figures say unemployment in the West Bank is 17 percent, a figure that may well under-represent the economic crisis, given the large numbers of underemployed in the West Bank.
She is also looking for a return of international aid to the town after Hamas dropped out of the municipal council. The Islamist group won nearly half the seats on the council in 2006 the last time municipal elections were held. That sparked a halt in aid programs by the European Union, United States and others because they consider the group a terror organization. However, Hamas, which rules the Gaza Strip, boycotted October's municipal elections, and now the council is held by leftists, independents and the moderate Fatah faction.
Baboun says her status as the town's first woman mayor can be a draw. "That people voted for me, even many men, is a sign Palestinians want change," she said.
"I think she is a remarkable woman and a remarkable person," said Nabil Shaath, an aide to Palestinian President Mahmoud Abbas. "I'm sure she will excel."
Many residents remain skeptical.
Ayesh Salahat, a young Palestinian, appeared unimpressed by the Christmas decorations of Manger Square and the elaborate fireworks that coincided with last week's lighting of the tree. Even as he watched dozens of tourists from all over the world taking pictures in the square, he said he doubted things would get better.
"I don't think we'll see any improvement in unemployment or services in Bethlehem," he said. "I'm not hopeful life will ever change here."
Outside the town's quaint Manger Square, Bethlehem is a drab, sprawling town with a dwindling Christian base.
Overall, there are only about 50,000 Christians in the West Bank, less than 3 percent of the population, the result of a lower birthrate and increased emigration. Bethlehem's Christians make up only a third of the town's residents, down from 75 percent a few decades ago.
Located on the southeastern outskirts of Jerusalem, Bethlehem is surrounded on three sides by a barrier Israel built to stop Palestinian militants after a wave of suicide bomb attacks in the last decade. Palestinians say the barrier has damaged their economy by restricting movement in and out of town.
"Our city is literally surrounded by settlements and walls," she said, pointing to the nearby barrier, where locals have painted a Christmas tree enclosed by gates. "It harms our growth, there's no exchange of people, ideas, goods."
Despite the hardships, Baboun said she is hopeful ahead of the holiday season, in large part due to the successful U.N. bid.
"This Christmas will be one of thanks, a message of peace for our statehood," she said, "but also a reminder that our fight is not over."