Australian troops in East Timor Capital Dili

DILI, May 29: Australian troops fanned out across sprawling neighbourhoods of East Timor's capital today but the city was largely peaceful following a weekend of violence by gangs allied to feuding factions of the country's armed forces.

The government of the world's newest independent state, which last week appealed for foreign troops to quell a rebellion by almost half of its army, was due to meet today for crisis talks amid constant rumours of major differences between the president and prime minister.

But with almost the entire 2,500-strong contingent of eacekeepers from Australia, Malaysia, New Zealand and Porugal now on the ground, residents were simply hoping for a sense of security so that they can return to their homes.

The Red Cross says more than 40,000 have been displaced by the fighting, and food and fuel supplies are running out.

Some petrol stations opened for business for the first time in nearly a week today, but prices went up and long queues swiftly formed.

''As long as the Australians are patrolling, we'll open,'' said Asveido Alamar, a pump attendant.

The past three days have seen Dili's ramshackle suburbs turn into a battleground for gangs of youths loosely allied to factions of the police or army.

Today, Australian Prime Minister John Howard described the violence as worse than that which followed East Timor's 1999 vote for independence from Indonesia.

''In a way, it is more dangerous than it was in 1999, because in 1999 you had in effect an ordered retreat, not the disparate disorganised number of gangs you are dealing with,'' Howard told Australian radio.

Timorese Prime Minister Mari Alkatiri sacked around 600 of the 1,400-strong army in April after public protests over what they said was discrimination against soldiers from the east.

Seven police were killed when they tried to disarm the rebel soldiers last week. Later both the army and police virtually disintegrated, with factions reluctant to engage each other and abandoning their uniforms and positions.

This left the field open for the notorious youth gangs, who began an arson and looting spree that continued until last night.

CIVIL WAR FEARS

Some observers in Dili say the country is on the verge of a civil war, with the country divided into the same pro- and anti-independence camps that fought so bloodily in the run-up to the 1999 referendum. But Timorese voted overwhelmingly for independence in that ballot and there is little sign on the ground of anyone yearning for a return to rule by Jakarta.

East Timor is one of the world's poorest nations and suffers from massive unemployment. Dozens of gangs have emerged and routinely fight turf wars regardless of the political situation.

A Portuguese colony for centuries, East Timor was annexed by Indonesia in 1976 in a move the United Nations condemned and much of the population resisted.

Australia led a U N-backed intervention force to East Timor in 1999 to quell violence by pro-Indonesian militias after the vote for independence. This was finally achieved in 2002 after almost three years of UN administration.

Apart from some coffee production, East Timor has virtually no economy but has signed lucrative oil and gas exploration deals for resources in the Timor Sea.

Analysts say the government has been too slow to identify development projects and put the money -- and millions of dollars in foreign aid -- to good use.

REUTERS