By John McBeth in Jakarta and Dan Murphy in Dili – Antonio da Silva lost his left ear to pro-independence Fretilin fighters. He doesn't intend to lose anything else. That's why he's outside the office of Indonesia's military commander in East Timor, waiting his turn to ask for weapons.

"We'll take guns from the army and fight to protect what is ours," says the 38-year-old leader of Young Guard to Protect Integration, a self-styled paramilitary group which is among the minority of Timorese opposing independence. "I promise you civil war if Indonesia pulls out."

Tension has soared in East Timor since January 27, when Indonesian President B.J. Habibie raised the prospect of giving the territory independence – as early as July next year. Although the vast majority of the 830,000 Timorese want to go it alone, Indonesian settlers and Timorese like da Silva fear they will be targeted for reprisals if the Indonesian army pulls out.

The tensions raise questions of whether East Timor will ever have the social and political cohesion to survive as an independent entity. What's more, does it have the basis for a viable economy? Who will nurse the country through transition towards independence?

For now, it's not even clear if matters will reach that stage. Popular opposition leader Megawati Sukarnoputri has threatened to scrap the independence offer if she wins Indonesia's June elections. Meanwhile, in United Nations-brokered talks, Indonesian and Portuguese negotiators are still hammering out a wide-ranging plan to give autonomy – rather than independence – to the former Portuguese colony.

The autonomy plan will be finalized by April, then presented to the Timorese. If they reject it, the process of cutting East Timor loose will be taken over by next October's session of the People's Consultative Assembly, Indonesia's highest legislative body, to be formed after the elections in June. The assembly will decide whether to revoke the 1978 resolution that made East Timor an Indonesian province, opening the way for an Indonesian withdrawal from East Timor by July next year.

Most Timorese, however, say they want a period of autonomy under Indonesian rule to build institutions and disarm the populace before independence. Jailed Fretilin resistance leader Xanana Gusmao has advocated five to 10 years of autonomy followed by a referendum. All but the most radical Timorese worry deeply that if the Indonesians leave abruptly, history could repeat itself: The Portuguese left behind a civil war when they withdrew in 1975.

Habibie's offer thus confronts the East Timorese with a stark choice: broad autonomy with no hope of independence, or independence next year. Many Timorese are convinced that Habibie's proposal was designed to fail. They see it as a ploy to show that East Timor – ruled by Indonesia since 1975 – cannot govern itself. "We've been offered two choices, and neither of them is the right one – which makes me doubt the government is dealing in good faith," says Arlindo Maia, the former rector of the University of East Timor.

But in Jakarta, a different motivation emerges. Habibie appears to have been the driving force behind the policy shift. Analysts say that Habibie and his supporters from the Indonesian Association of Muslim Intellectuals have not been kindly disposed towards throwing money at the Catholic-dominated province, where Muslim settlers were being mistreated and resistance has continued unabated. (Government spending accounts for half of East Timor's $113 million annual GDP.) Academics, new-generation military officers and a growing number of officials had also long been pondering the prospect of a change in policy.

"This is not a fit of pique," says Dewi Fortuna Anwar, the president's adviser on foreign affairs. "It's a realistic solution. We see East Timor as an appendix giving a fever to the rest of the country." Former President Suharto refused to acknowledge that, she says, but the current political transition "means there is a whole new prism through which we see the issue."

The new outlook became official policy when Habibie decided to announce it to the cabinet late last month. His sudden decision was triggered by a letter from Australian Prime Minister John Howard a few days before Christmas, saying that Canberra would change its policy and join the chorus urging self-determination for East Timor. "Why don't we just let East Timor go," Habibie told his aides. "Haven't we suffered enough character assassination as a nation because of this?"

Habibie circulated the letter and a memo prepared by his foreign-policy advisers to seven ministers with political and security portfolios. He asked them to study a recommendation which Suharto and the military would have dismissed out of hand eight months ago. Then at a cabinet meeting on January 27, it became official: In an emotional 20-minute presentation, Habibie declared that if the East Timorese truly didn't want to belong to Indonesia, then it was only fair and democratic to give them the option of choosing independence as soon as possible.

Remarkably, applause broke out around the table – an expression of the relief many Indonesians feel at finally getting to grips with a problem that has blackened Indonesia's name internationally. "This has been more than a pebble in our shoe," says one Indonesian diplomat, repeating Foreign Minister Ali Alatas's often-quoted complaint. "It's been a millstone around our neck."

Alatas will be meeting his Portuguese counterpart, Jaime Gama, and UN Secretary-General Kofi Annan in New York this month. Since Indonesia has ruled out a referendum, the negotiators will have to find a way to assess whether the Timorese favour the autonomy plan – or immediate independence. "It could be intra-Timorese talks, but there will be a mechanism to find out what the views are of an overwhelming number of the East Timorese," Alatas told the Review. He says that if autonomy is not accepted, then Indonesia "will part ways in an honourable, peaceful and orderly way – we're not just going to pack up and leave and say goodbye."

Still, Western diplomats and Timorese leaders question the take-it-or-leave-it nature of Indonesia's decision. They say that without a referendum, pro-and anti-independence forces will turn the province into a battleground. The potential for conflict between Gusmao's separatist guerrillas and newly armed pro-integration groups is growing.

Trouble is already brewing on the ground. On January 29, members of an anti-independence paramilitary group were inside Dili's Mahkota hotel, meeting the local Indonesian military commander, Col. Tono Suratman. When pro-independence demonstrators shouted abuse, a handful of the paramilitaries came charging out, firing M-16s in the air.

"The tension is so high that all it would take is a spark right now," says Francisco Gueterres, law and politics professor at the University of East Timor, who is trying to act as broker between local Fretilin and integrationist commanders. "We need to find a way to avoid bloodshed."

Fomenting the tension, the Indonesian army has supplied hundreds of weapons in the past month or so to previously unarmed loyalists in eight of East Timor's 13 districts. "This is very irresponsible," says Roque Rodrigues, head of the Lisbon office of the National Council for Timorese Resistance.

Defence Minister and armed-forces chief Gen. Wiranto denies that the army is providing new arms to anyone. Indeed, Wiranto has called the policy change on East Timor "most appropriate."

If independence comes, former East Timor Governor Mario Viegas Carrascalau believes a strong UN transition authority would be needed for at least two years, backed by peacekeeping troops from Australia, New Zealand, Portugal and possibly Indonesia. "It would be important for Indonesia to play some sort of role to ensure it doesn't sabotage the process and to show its good faith," says Carrascalau. "Everything has to have the blessing of the Indonesians, otherwise it is useless."

But Habibie's ministers insist that in scrapping the resolution annexing East Timor, the People's Consultative Assembly should not describe the action as a mistake. "Geopolitical needs at the time necessitated its annexation," says Dewi, Habibie's adviser on foreign affairs. "Despite all the money and sacrifices, Indonesia failed to win the hearts and minds of the Timorese, in much the same way as the United States failed to win the hearts and minds of the Vietnamese."