I've shot quite a bit in Israel since about '96, right across the digital divide with F5s, N90s, D1x, Kodak SLRn and D2x, working with an archaeological dig near Beth Shean (www.rehov.org
I also shot a bit on my own hook in Jerusalem. I think your project idea is terrific -- and there's a great history of Jerusalem and Holy Land photography that goes back as far as photography does. I can't think of a better city for it.
My experience, though, is that you're not going to hold both light and shade in Jerusalem, especially in places like the Old City, no matter what you shoot, so you don't have to worry about it. There's just too much range, at least, in the summer; you might do well on those rainy days in winter and spring, but to me, rainy days don't say "Jerusalem." On the other hand, as a wedding photographer, you should be well equipped to handle the lighting problems, which I would say would be about the same as between a small dark English chapel and a bright June English day...or perhaps a stop or two brighter than that, given all those white stone walls.
The biggest problem I'd have with shooting film is the processing -- B&W processing is really getting tough in Israel, the last time we checked, and was *very* expensive. We checked because we really didn't need color for most of the scholarly publications, and we were somehow under the illusion that B&W might be cheaper. Wrong. I'm sure there must be pro labs in Tel Aviv, if not in Jerusalem itself, but we also had variable results with our color processing, mostly just from poor handling. (On the other hand, we were always trying to get it done as inexpensively as we could, which might have been part of the problem.) If you decide to go with film, I'd make a really serious effort to nail down a good lab immediately.
What I'm saying is, I'd think hard before deciding to go with film.
I'm currently making a transition from my Nikon gear (D2x) to Leica (shooting a digital R-D1 for the moment.) The R-D1 is a nice camera, although with some handling peculiarities -- Sean Reid, who reviews it on this forum, and more extensively on his own forum, uses it for pro work. It's 6mp, and a good 6mp, but it really can't yet match the top-end Nikons or Canons for big-print quality. The upcoming 10mp Leica will do that. It should be out in September, for $5,000. That should be in your range, if you're also thinking of buying a Nikon scanner for a film camera...If you were thinking of a book, though, as opposed to shooting for an exhibition where you'd need large prints, the R-D1 would probably work.
But the best thing about the Leica (any Leica-based camera, R-D1 or film) would be the lenses. An f/1.4 Summilux in 35mm or 50mm would be great for sniping shop photos in the Old City. I've been doing that in an old river town in Minnesota, and they work great. Also, the neew Leica will be a 1.33 crop, so a 50 will become a ~66. A Noctilux would become an f/1 66mm short tele and I'm not sure there'd be a better lens for low-light, shadowy photography...and the cropped sensor will even minimize some of the Noctilux's film problems.
From your posts I assume you're an Israeli of one flavor or another, but I'll tell you this anyway: if you really want to shoot invisibly, with any kind of camera, my suggestion would be to dress like an American fundamentalist Christian when you're shooting: short-sleeved shirt, khaki slacks, white Tilly canvas hat, fanny pack, wooden cross on a leather string around your neck, and a smile. Nobody, Israeli or Arab, will pay the slightest attention to you. A person I know, who shall go forever unnamed, smuggled a TV into Israel dressed like that, although he also stuck a baby on top of the TV box. Not even customs wanted to talk to him...