Be careful if using a hire-car, as most rental companies in Israel make it clear that the car has to be used, and remain, on Israeli soil.
There is an Arab bus station nearby Damascus Gate that goes to various West Bank Palestinian cities (if you have trouble finding the bus station, ask a local). Arab bus 21 runs from the Arabic bus station nearby the Damascus Gate ("Bab el-'Amoud") in East Jerusalem via Beit Jala to Bethlehem. The average trip length is 30 minutes and costs ₪7. This route takes you straight into Bethlehem without needing to stop at a checkpoint (someone might come to check your passport on the bus, but it's painless). After you cross the border, tell the driver where you're headed and he'll let you know what the best stop is to get off (maybe about 10 minutes after entering the border). From there you can either cab to the main area (Manger Square, Church of Nativity), or just walk.
Shared taxis leave from the Arab bus station nearby Damascus Gate and manage the trip in 20 minutes.
Minibus 24 also leaves from the Arab Bus
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