The nine rooms range from $30 for a bunk bed in one room to $965 per night for the presidential suite.
The Walled-Off Hotel in Bethlehem is only four metres (yards) from the controversial wall which cuts through the occupied West Bank, and all the rooms face it.
The nine rooms, which Banksy described as having the "worst view of hotel in the world," range from $30 for a bunk bed in one room to $965 per night for the presidential suite.
Guests, who will each put down a $1,000 deposit to ward off theft of the dozens of new Banksy works on the walls, were due to start arriving early afternoon, hotel staff said.
Manager Wissam Salsaa said they were nearly totally booked for the next three months.
"We have arrivals today from six different countries, and I think most of our clients are flying just to stay here," he told AFP.
He rejected criticism the prices were unaffordable for many Palestinians, saying they had nearly 50 staff to pay and any profits would go back into the community.
"Everyone that came here thinks this is the most amazing project," he said. "For letting the voice of the Palestinians be heard."
The hotel was announced unexpectedly at the beginning of the month and the artwork, Banksy's largest new collection in years, has been donated to the local community, the hotel's website says.
The artist closely protects his identity and was not in attendance at the launch.
The wall is one of the most striking symbols of Israel's 50-year occupation, and has become a major focus for demonstrations and artwork -- including by Banksy.
Israel refers to it as the security barrier and insists it is crucial for keeping out would-be attackers, but an advisory opinion by the International Court of Justice declared it illegal in 2004.
The hotel's website encourages guests to explore the possibility of painting on the wall -- with a graffiti supplies store next door with "everything you need to make your mark".
There was no major launch party planned, with staff dressed in red waistcoats serving Walled-Off Salads and afternoon tea in the lobby.
A few tourists mulled around inspecting the gallery selling Palestinian art and a museum highlighting the history of the region.
Bea Kaufmann, a German living in the Israeli commercial capital Tel Aviv, said she had come with friends as she thinks it is "important to see the other side" of the conflict.
The rooms themselves have a deliberate faded luxury, with typical Banksy touches.
Above a bed in one room an Israeli soldier and Palestinian protester fight with pillows, while a television supposedly showing CNN is cracked and backwards.
In the presidential suite, a working jacuzzi is fed from a leaking water tank similar to those that adorn the roofs of many Palestinian homes.
The museum's curator, British professor Gavin Grindon, told AFP earlier this month they wanted to highlight the negative impact of Western intervention.
"A lot of other hotels have a gym, this one has a museum."
"It is 100 years that British people have been coming here and making a bit of an imperial mess, from Tony Blair all the way back to Lord (Arthur) Balfour in 1917."
The Balfour Declaration, signed by then British foreign secretary Balfour in 1917, promised the Jews a homeland in what was then mandate Palestine.
The agreement is hailed by Israel as paving the way for its creation in 1948 and detested by Palestinians, who say it gave away their homeland.
Banksy has a long history in the Palestinian territories.
In February 2015, he allegedly sneaked into the Gaza Strip through a smuggling tunnel and painted three works on the walls of Gaza homes destroyed in Israeli air strikes during the previous year's conflict.
In 2007, he painted a number of artworks in Bethlehem, including a young girl frisking an Israeli soldier pinned up against a wall.
In 2005, he sprayed nine stencilled images at different locations along the eight-metre-high (27 foot) wall.
They included a ladder reaching over the wall, a young girl being carried over it by balloons and a window on the grey concrete showing beautiful mountains in the background.
His works, like elsewhere in the world, have become tourist attractions.