Physically, it is situated five miles south/southwest of Jerusalem along the main ridge route (to Hebron and Egypt), in the area of Judah. It was also called Ephrath ("fruitful") and/or Ephrathah during ancient times. The region was known for its fertile hills and valleys. Bluntly, it was an insignificant town-though ancient- during OT times, its major notices being: Ruth dying near there; King David's birthplace; and finally Micah prophesied that the Messiah would come from there.
Bethlehem is first noted as the burial place of Rachel (wife of Jacob), though scholars debate over the precise location of burial and whether she had a different place for burial and another for her tomb. It is clear, though, that Matthew references her in 2:18 as part of the fulfillment of the scripture, "Rachel weeping for her children and refusing to be comforted, for they are no more." This is in reference, of course, to the slaughter of innocents at Bethlehem.
The next major event(s) around Bethlehem occur when we enter the time of King David. David was originally a shepherd of sheep in Bethlehem. Much of the book of Ruth takes place there, as the is the great-grandmother of King David. The parallels between the great king David and Jesus need no illumination.
When Jesus was born, Bethlehem was still a small town. The leaders knew of Micah's prophecy (see Micah, chapter 5), which in part led Herod to there. Both Matthew and Luke note Bethlehem in the infancy narratives.
The Church of the Nativity was founded by Justin Martyr in the 2nd century; he identified a cave near the village as the place of Jesus' birth (the cave was supposed to have served as a stable for the inn). Constantine funded the constructed the first basilica there at his mother Helena's request/prompting in approx. 330 A.D. Church Father Jerome is said to have spent thirty years here, starting in 386, translating the Bible into the Latin Vulgate.
It was rebuilt more grandly in the sixth century by Justinian. The Christian population in the region severely declined after the Muslim conquest, although some revival took place during the Crusades. Finally, repairs were started again in 1670. It is one of the oldest Christian churches in existence, and continues to be an area of tension.
Archeological knowledge: It was first settled in the Paleolithic era, but is first mentioned in the Amarna letters (14th century B.C., Egypt's governor for pharaoh wrote to him about "Bit-Lahmi").
The Israel Antiquities Authority recently released information about "The first ancient artifact constituting tangible evidence of the existence of the city of Bethlehem" seemingly from the 7th or 8th century B.C.