Bethlehem is popular with Christian pilgrims. However, many of the city's hotels suffer from low occupancy outside the Christmas season because of security concerns, and tour operators often bring in visitors only for the day, returning them to sleep in Israeli hotels.
Israel built a network of walls and fences, sections of which run in the occupied West Bank, in response to the violence of the second intifada in the early 2000s. The International Court of Justice ruled in 2004 that the barrier was in breach of international law.
Banksy's new hotel brought mixed reactions from Palestinians on Friday. Xavier Abu Eid, a spokesman for the Palestine Liberation Organisation, said it was an "excellent initiative".
"Israel's monopoly over tourism makes thousands ignore the facts around them, including the annexation wall," he wrote on Twitter.