Amy Chew, Jakarta – The 22nd anniversary of Indonesia's annexation of East Timor passed off peacefully in Dili on Friday as the territory's jailed guerrilla leader opened the way for direct diplomatic contact between Jakarta and Lisbon.

Hundreds of troops and police patrolled Dili, capital of the former Portuguese colony, to prevent a recurrence of the violence during anti-Indonesian demonstrations last month in which at least three people died.

In Jakarta, the territory's jailed guerrilla leader, Xanana Gusmao, offered a way out of a diplomatic impasse by saying he agreed Jakarta and Lisbon should be able to establish a form of diplomatic relations while he was still in prison.

"I agree that special interest sections between Portugal and Indonesia can proceed without me being released," he told reporters after meeting U.N. special envoy Jamsheed Marker in Jakarta's Cipinang prison. A diplomat who closely follows East Timorese affairs said Gusmao's comments had a symbolic meaning.

"If they (set up special interest sections), it will be the first confidence-building measure they will have agreed to and it will help the atmosphere when they next meet... It is necessary for them to get some agreement to get a sense of progress being made," he said.

Nations without formal diplomatic ties frequently maintain so-called special interest sections staffed by their diplomats in friendly embassies. Portuguese Prime Minister Antonio Guterres, in a meeting with Suharto in Bangkok in 1996, proposed special interest sections. But this fell through over Portugal's insistence that Gusmao – serving a 20-year sentence for armed insurgency – be released.

East Timor's Jakarta-appointed governor Abilio Soares said at a formal anniversary ceremony in Dili that the territory's 1976 integration as Indonesia's 27th province had been the wish of the people to free themselves from Portugal. Soares told about 500 civil servants and representatives of the police and military: "Twenty-two years have passed and East Timor has become and inseparable part of the Republic of Indonesia." Ordinary East Timorese however were noticeable by their absence from the morning ceremony in the square in front of the whitewashed colonial-era governor's office bedecked with red and white Indonesian flags facing the seafront.

Marker said he had discussed with Gusmao Indonesian proposals for a settlement of the East Timor issue, a running sore in Jakarta's foreign relations for two decades. Indonesian Foreign Ministry spokesman Ghaffar Fadyl said on Friday the ministry would be interested to see Lisbon's reaction to Gusmao's comments.

East Timor's most vocal anti-Indonesian spokesman abroad, Nobel Peace Prize winner Jose Ramos Horta, told Reuters in Lisbon from Cape Verde that he backed Gusmao on the special interests idea. "I urge Portugal and Indonesia to proceed as expediently as possible...", he said. There was no immediate comment from Portuguese officials.

Marker arrived in Jakarta on Thursday and reported to Alatas on what he said was an encouraging response from Lisbon to Indonesia's proposals on East Timor. Alatas said U.N. Secretary-General Kofi Annan had invited him and his Portuguese counterpart to a meeting in early August to discuss East Timor. The exact date had yet to be set.

Marker is expected to visit East Timor before he leaves for New York on Wednesday. But he said his programme was still being worked out. Marker, who is also due to meet Habibie, possibly on Saturday, told reporters after meeting Gusmao he had raised the rebel leaders imprisonment with the Indonesian authorities.

[On July 18, a Dow Jones Newsire report said that more than 300 students demanded self-determination for East Timor held a noisy but peaceful demonstration at the University of East Timor. One of the banners at the demonstration read "Australia and Indonesia – the East Timor Gap is not yours". According to a July 18 report by AFP, foreign minister Ali Alatas has insisted that Marker should not go to Dili, citing violence when EU ambassadors visited earlier in the month - James Balowski.]