It is one of the most unlikely events on the Palestinian calendar: a rollicking two-day beer festival in a West Bank village which attracts thousands of visitors to sample the ales while listening to live music amid the stony hills and olive groves characteristic of the biblical landscape.

But this weekend's Taybeh beer festival has been forced to relocate from the tiny Christian village that is home to Palestine's only brewery to the grounds of a five-star hotel in Ramallah. It is akin to moving Glastonbury to the London Hilton.

Behind the change of venue lies growing tensions between the brewery's founder and Taybeh's former mayor, David Khoury, and a newly installed village council attempting to curb his company's domination of the community. Success, resentment and social conservatism swirl in a potent mix that is disturbing the tranquillity of the picturesque ancient village.

The annual festival was launched in 2005 as part of a drive by the Khoury family to encourage people to come to Taybeh, "to drink a glass of beer, buy a jar of local honey or a bottle of olive oil, eat falafel and listen to music – and to see that we are normal people, thirsty for life and freedom, and we deserve to live like people in the rest of the world," said Khoury.

Last year's festival attracted a record 16,000 visitors, including people from surrounding Palestinian villages, politicians, Israelis, international diplomats and NGO workers. The following month Khoury stood down as mayor after seven years and a new village council, made up of representatives of prominent local families, was appointed by the Palestinian Authority.

Simmering tensions over the festival and the brewery had previously led to Khoury being shot at while on his veranda and his car being torched. The council demanded Khoury pay a fee of 300,000 shekels (£52,000) plus half the income from beer sales in order to hold the festival in the municipality's buildings and grounds. It argued that the festival incurred costs and gave rise to security issues, and that the entire village should share any proceeds.

But, according to Khoury, the festival has always run at a loss. He suggested there were other reasons behind the council's demand. "They think it only benefits Taybeh Beer. But they also don't like the outsiders coming to the village,they don't want to open up to the world," he said.

Some were disturbed by the presence of western women, the conspicuous consumption of alcohol on the streets, and outsiders wandering around the village cemetery and churches. There was also resentment over the brewery's success, Khoury said. "This is the price I pay in a society where the culture is not one of working hard and making wealth. The culture here is … one of jealousy, corruption and blackmail."

Khoury returned to Palestine in 1995 after 35 years as a businessman in the US, buoyed by the wave of optimism that followed the signing of the Oslo accords two years earlier.

"I wanted to invest in my country. We were promised a new state, a new Palestine, a democracy with freedom to practice our religion and develop an economy."

His family invested much of its money in the microbrewery, which now exports beer to Europe and Japan as well as selling in the West Bank, East Jerusalem and Israel. It has recently begun making wine from locally grown grapes and is building an 80-bedroom hotel in the village.

On his return from the US, Khoury was struck by the poor state of the village's infrastructure and services. He stood for election as mayor, and in the following years brought in millions of pounds of aid money to repair roads, improve garbage collection, rebuild schools, create public spaces and restore the charming old quarter of the village.

The new mayor is Khoury's brother-in-law, a supporter of the festival, but the majority of council members are hostile. After attempts to negotiate a compromise over the sum of money the council demanded to host the festival, Khoury decided to relocate it to the Movenpick hotel in Ramallah. He said the festival would inevitably be smaller and the atmosphere markedly different, but at least it would go ahead.

He said he was angry and frustrated that the festival would not be in Taybeh this year.

"The council does not represent the views of most Taybeh people. The people who will suffer are the guys who sell their falafel and shawarma, and the ladies association that sells traditional Palestinian embroidery, the taxi drivers and the local shops."

But he said: "I will definitely bring the beer festival back to Taybeh. This is the new face of Palestine."