Palestinian sources say a breakthrough may be near in the stand-off at the Church of the Nativity in Bethlehem, where nearly 200 people have been under siege for the past month.

The mayor of Bethlehem Hana Nasser says he expects the month-long siege will be resolved soon. He says that negotiations have resumed, with new teams, including top aides to the Palestinian Chairman Yasser Arafat and American diplomats. Israeli negotiators say they are also optimistic that a solution is near.

It is understood that the lifting of the siege in Ramallah earlier this week, which saw Yasar Arafat freed from his compound, may be a model for resolving this stand-off.

However even as negotiations continue, there was an explosion in the Church compound. The Israeli army says it found a makeshift bomb factory in a temporary hospital near Manger Square, with bags of fertilizer and chemical bottles as well as nails - often used as shrapnel by bomb-makers. The army says it let off a controlled explosion there to prevent any further damage.

Israeli tanks and troops surround the Church, which Christians believe is the site where Jesus was born. Israel says it is seeking around 30 Palestinian militants who took refuge in the Church to avoid capture. The rest of those under siege are civilians, including monks and nuns.

More than 85 people have left the Church over the past month, and several Palestinian fighters have been killed, including at least one shot walking out in the compound Saturday. Palestinian spokesmen say the man was a member of the Force 17 presidential guard. Israeli military sources say he was a wanted militant, responsible for attacks on Israeli civilians.