The Palestinian villagers of Nu'man have lived on their hilltop for generations, looking out across sweeping views of the terraced olive-tree slopes of the West Bank. But their view is changing dramatically and they fear there will be little place for Nu'man in the new landscape.

The village, close to the city of Bethlehem, is surrounded on three sides by Israel's vast West Bank barrier, here a wide steel fence. At its entrance is a military checkpoint, where Israeli soldiers have orders to let no one other than the 200-odd villagers into Nu'man. Looming just to the west is the large Israeli settlement of Har Homa, already home to as many as 15,000 settlers, with an expansion planned on to a portion of Nu'man's land.

There is one barely functioning shop in the village, but no school, mosque or health clinic. There is no public transport and there are no permits for the younger generations to build themselves new homes.

As far as Israel is concerned, Nu'man is in Jerusalem, within the slice of the West Bank that it annexed after capturing the land in the 1967 war, an annexation unrecognised by the rest of the international community.

Although Israel took the land, it did not take the villagers. They were not given Jerusalem residency and do not receive the city's services. Instead they retain their West Bank identity cards, which means they cannot travel to Jerusalem and explains why in the past some have been detained for the perplexing crime of living in their own homes.

For most of the past four decades, villagers like Ibrahim Darawi, 62, lived their lives in the West Bank, walking over the hills to the nearby villages to shop, work and pray. But once Israel began building its West Bank barrier in 2002, the situation changed rapidly. "Now the village is inside the wall," Darawi said. "They want to force us to leave. It's a quiet transfer."

Israel insists its barrier is crucial in the effort to stop terrorist attacks inside Israel. However, for most of its route it runs inside the West Bank, sometimes deep inside, effectively attaching Jewish settlements and parts of the West Bank to the rest of Israel. The international court of justice has said in an advisory opinion that the barrier is illegal where it crosses into the West Bank and should be torn down.

No new houses can be built in Nu'man – those that have been built without permits have been demolished or face demolition orders. Villagers are not allowed to enlarge existing homes either, leaving Darawi unable to expand the two-bedroom apartment where he lives with a family of 11. His eight children study in the kitchen and when they finish university they will leave Nu'man and follow careers elsewhere.

"It's a tragedy," he said. "I think the strategy is that 15 years from now the village will be quite empty. The old will die and the young will leave." The villagers have twice petitioned Israel's supreme court for Nu'man to be recognised as part of the West Bank, or for its residents to be given Jerusalem residency cards. The case is pending.

The UN, in a new report that warns of the growing fragmentation and weakening of the Bethlehem region in the face of the Israeli occupation, describes Nu'man as a village "living in limbo."

Village land has been confiscated, the UN says, for the construction of the barrier, an Israeli border police base, a major checkpoint and for a new settler bypass road that leads from Jerusalem out to Jewish settlements deep inside the occupied West Bank, including Nokdim, home to Israel's hardline foreign minister, Avigdor Lieberman.

"The combined restrictions have segregated the village from neighbouring communities and obstructed normal family life," says the UN office for the co-ordination of humanitarian affairs said. "Young couples are prevented from building in the community because of the impossibility of receiving construction permits."

For Niveen Darawi, 20, this much is obvious. She is in her third year of a five-year computer engineering degree and still living at home in Nu'man. After that, she will go. "I will have to leave the village. It will happen," she said. "People here cannot build, so people have left. I think Israel wants it that way."