DRESDEN, GERMANY (AFP) - The mulled wine is brewing and the chestnuts are ready to roast, but with Covid-19 cases soaring, the festive season is hanging in the balance for Germany's famous Christmas markets.

As the government scrambles to respond to a dramatic rise in infections over the past two weeks, some of the traditional markets have already been cancelled while others are still waiting nervously for decisions.

The Striezelmarkt in Dresden, the oldest Christmas market in Germany which draws around three million visitors annually, is due to open on Nov 22.

Stallholders have already built their wooden huts and are busy hanging decorations and assembling wooden figures. But they might have to take it all down again at any moment.

"I can't describe what we are going through at the moment," Ms Karin Hantsche, who has been selling traditional gingerbread at the market for 32 years, tells AFP. "We are not sleeping at night, we are so nervous and tense."

The state of Saxony has said the markets can go ahead, but local authorities in Dresden are due to meet on Nov 25 and could take a different view.

The central government and the leaders of Germany's 16 states are also due to meet this week to discuss new national measures.

With the country's seven-day incidence rate soaring to more than 300 infections per 100,000 people, they are expected to agree on new restrictions such as limiting large gatherings to those who have been vaccinated or recovered from the disease.

But these rules would be impossible to implement at the Striezelmarkt, which has no perimeter fence or entrance controls.

For Ms Hantsche, whose company brings in 50 per cent of its income over the Christmas period, the closure of the market would be a disaster.

"Not everyone will survive this, and for me I can't say yet," she says.

"We are prepared to immediately lay everyone off again if the pandemic situation requires it. But we need some form of compensation for costs, and at the moment we do not have that."

Christmas markets have been an annual fixture in Germany since the 15th century, when craftsmen and bakers were given special permission to ply their wares in town squares in the run-up to Christmas.

In pre-pandemic times, the markets drew about 160 million visitors annually and brought in revenues of €3 billion to €5 billion (S$4.61 billion to $$7.68 billion), according to the BSM stallkeepers' industry association.

But most German cities cancelled their Christmas markets last year as Covid-19 cases began spiralling, despite the financial losses.

Munich on Tuesday (Nov 16) became the first major German city to cancel its 2021 Christmas market, with several smaller markets already cancelled across Germany.

Others are still planning to go ahead, but with restrictions: In Leipzig, there will be no alcohol, while in Nuremberg, the market will be pared down and split across several locations.

Mr Markus Harich, who has been selling traditional festive mulled wine and other drinks at the Striezelmarkt for 30 years, is busy putting the finishing touches to his wooden hut.

"We are in a very difficult situation at the moment," he says. "We don't know what will happen next. Will we open at all? Will the regulations be changed?"

He too has had "sleepless nights" worrying about the future of his business. "The goods are ordered, but nobody is giving us any information... At the moment, we have really been left alone in a vacuum."

Mr Ulrich Poetschke, who sells traditional artwork from Germany's Erzgebirge region, spends most of the year preparing for the festive season because "the most important business for us is the Christmas business".

"We are hearing different news every day about whether the market is taking place, so it is a very, very difficult situation for the traders," he says.