Leading sculptor Tim Chalk is creating the work of art, paid for by Kwik-Fit founder Sir Tom Farmer, to take pride of place next to the city’s first winter floral clock in Princes Street Gardens.
But the acclaimed artist has sparked controversy by suggesting his Nativity is as much a reminder of those left homeless after the war in Baghdad as of the birth of Jesus.
Mr Chalk said he wanted to create a thought-provoking and "timeless" image of dispossessed people, rather than a straightforward Nativity scene.
His sculpture has won the backing of the city’s church leaders and other religious organisations. But the Royal British Legion has accused him of taking a "cheap shot" and having a prior agenda by linking Christmas with the situation in Iraq.
The open-air structure, which will go on display over Christmas and Hogmanay each year, is the first Nativity scene to become a major part of the city’s festivities. It will be lit up at night and visible from as far away as the top of The Mound.
The sculpture is a gift to the city from Sir Tom who has agreed to pay several thousand pounds for the work to be commissioned.
The artist given the job of creating the Nativity scene said he wanted the work to stimulate debate.
Mr Chalk said: "You would assume that it’s an obvious subject matter, but in fact there’s considerable scope for interpretation. I felt I was dealing with a subject that many people may have pre-conceived ideas about. It hasn’t been my intention to challenge those perceptions, but rather to attract attention and stimulate debate.
"The sculpture aims to present a timeless and universal image of dispossessed people sheltering in a derelict structure that could be Palestine 2000 years ago or Baghdad in recent weeks.
"I want this sculpture to convey the emotional intensity of the arrival of a new baby and to encourage people to focus on the core values of the Christmas story."
But Mr Chalk was criticised by the Scottish branch of the Royal British Legion for linking his Nativity with Iraq.
A spokesman said: "If he equated Palestine 2000 years ago with Palestine today, it would be more relevant. But to try and associate it with displaced people in Iraq which is now safer than before [the war], would appear to suggest a prior agenda.
"There is no relevance to Christianity and it’s a bit of a cheap shot to say that Nativity scenes relate to hostilities, or even liberation, in Iraq. It is unfair on security forces and living standards in Iraq. The Christmas message is bigger than that."
Mr Chalk is responsible for a number of other high-profile works in the Capital, including a horse sculpture in the Museum of Scotland and a mural at the corner of Great Junction Street and Ferry Road.
The artist was commissioned after churches and other religious organisations gave the sculpture their backing - a condition set by Sir Tom.
The Nativity will be made from Jesmonite, a plaster powder that is mixed with water and when set looks like stone, and covered by a stable made from stained rough timber.
The sculpture will be unveiled on November 30 when a special cross-denominational service will be held to bless it.
A spokesman for the council said: "We decided we want to create a Nativity scene as part of the Capital Christmas celebrations to give it more of a religious element.
"We approached Sir Tom Farmer to see if he would be interested in funding it and he thought it was a great idea."
Sir Tom added: "For some time there’s been a strong need to bring the true meaning of Christmas to the city’s festive celebrations and I can think of no better way than reminding people of the birth of Christ.
"I’m pleased by the design of the sculpture and the way in which Tim Chalk has consulted with various groups and added a contemporary touch to the Nativity."
A Church of Scotland spokesman added: "We welcome the introduction of the Nativity sculpture during the Christmas season and hope that it will act as a reminder to people of the true meaning of Christmas."