BETHLEHEM, West Bank, Sept 9 (Reuters) - Israeli soldiers blew up a bomb hidden by militants in a Muslim cemetery in Bethlehem on Thursday, prompting an outcry by Palestinians who said the graveyard had been desecrated. Israel said the militants were to blame for the damage when troops detonated the bomb concealed in an empty grave. The location is especially sensitive as it is near Rachel's Tomb, a flashpoint West Bank shrine that is one of Judaism's holiest sites. "We didn't desecrate a cemetery. We neutralised a bomb," said army spokesman Jacob Dallal. But the explosion also destroyed the nearby grave of a 60-year-old Palestinian and rankled the nerves of local people who said the soldiers had violated the sanctity of Bethlehem's only Muslim cemetery. The head of Bethlehem's Islamic Waqf, which oversees the cemetery, said even the presence of a bomb would not justify the army's actions and it should have coordinated with Muslim religious authorities. "This is the first time we see the remains of the dead strewn into the open air. It is a violation of Islamic law, a very serious violation," said Waqf chief Nasr Nawfal. "Even the entry of an Israeli soldier to the cemetery is forbidden." (Even the existence of terrorist Islamists in Israel is forbidden and a very serious violation of international law.) Witnesses said soldiers had found the bomb hidden inside an empty tomb above ground. The army said it was too dangerous to remove the bomb to detonate elsewhere. But the explosion destroyed the grave of Mohammed Khalil, who died in 2001 of natural causes. A relative said his family had moved his remains to a new grave far away. "It was very painful to see that shameful and appalling scene," said Mustafa Ma'ali, 70. The cemetery abuts Rachel's Tomb, which Jews regard as the final resting place of the biblical matriach. The site is also sacred to Muslims who say the real Rachel's Tomb is elsewhere and the compound in question contains a revered old mosque, Bilal Bin Rabah, from which they have been barred since Israel captured the West Bank in the 1967 Middle East war. Bethlehem is also holy to Christians, who revere it as the birthplace of Jesus.