Lindsay Murdoch, Poso – Bodies are rotting by the road or floating down rivers. Nearly all have had their heads cut off, their hands tied behind their backs. Mosques and churches are destroyed. Houses and shops are burnt to the ground. Entire villages are packing up or have already left for makeshift refugee camps, the future unknown.

This is the ugly new Indonesia, where Muslims and Christians who have lived in peace for decades are locked in a vicious war that shows no sign of ending.

In Jakarta, the enfeebled Government fears similar conflicts could erupt across the vast archipelago as the demoralised armed forces either refuse or cannot maintain the same level of order it did during the 32-year Soeharto dictatorship.

"Welcome to Poso," reads a Government billboard on the outskirts of this isolated town in Central Sulawesi, the contorted island that sprawls between Borneo and the violence-wracked Ambon island chain. But that was before. Poso is now a ghost town where police and soldiers who arrived too late to stop the killings spend long, hot days sitting under trees or patrolling streets where nobody lives any more.

Only a few weeks ago this was a busy riverside town of 20,000 people – half of them Christians, half Muslims. Famous for its wild orchids and surrounded by clove-covered hills, the 32,300- hectare Poso lake is one of the most spectacular places in Indonesia. There has been trouble here before, but nothing like this. In April, a local newspaper published a report forecasting that riots were about to break out, quoting a local politician.

A midnight fight between drunken teenagers then set off a vicious cycle of revenge attacks and rampaging by rival vigilante gangs - red (Christians) versus white (Muslims).

Yesterday, the official dead toll had reached 165. But Muslim leaders have recorded 512 of their people either dead or missing while the Christian side says 28 of its supporters have been killed. Hundreds of people have been wounded and at least 4,000 houses have been destroyed.

The leaders of both sides agree that the cause of the violence can be traced to a campaign two years ago by rival politicians – one Muslim, the other Christian – for the job of mayor, or bupati. The politicians bankrolled groups of supporters who ended up attacking each other. The terrible things that have happened in the past few weeks have been acts of revenge.

"The problem was political, at first," said a conservative Muslim leader, Mr Yahya Al-Amri. "But it developed into a religious conflict. People with power and money are responsible."

Unlike the Ambon islands, less than a 1,000 kilometres east, where Jihad Muslim fighters have been slaughtering Christians and the Government imposed a state of emergency this week, the Christians of Poso appear far more organised and ruthless than the Muslims.

The signature of the red gang is that they behead their Muslim enemies. But there are limits, say Christian leaders. They must not attack women, children or unarmed men. They must not rape, loot or destroy mosques. A Christian man who raped a Muslim women this month was killed by men from his own side. But it is difficult for outsiders to understand the intense hatred that this conflict has created.

Nine kilometres along a road that winds south from Poso, blood splattered on the walls and floor of a mosque shows that this was one of the Christians' killing grounds. The charred bones of a man lies outside. Surrounding villages are burnt, empty and eerily silent.

Most of the people who lived here were Muslims who had come to Sulawesi from Java and other more densely populated areas in the past couple of decades. Local leaders say they worked harder and were more prosperous than the traditional villagers, which created animosity. The migrants have been the main targets of the Christian vigilantes.

A few kilometres along the road south, Sergeant Saefuddin Dehong of the Indonesian police spends his days searching for bodies that have been dumped in deep ravines along the roadside. His grisly job is to take the heads of the rotting bodies he finds back to a military base in Poso for identification.

Mrs Warsimurni, 40, a Muslim, spent nine days hiding in the jungle with her husband, Muhdawan, 45, their 18-year-old daughter, Dasiyen, and 15-year-old son, Rahmat, after she heard in the Poso market that armed Christians were about to attack Muslims.

But Christian men wearing Ninja-style hoods captured them among dozens of others. The men and boys were separated from the women and children. Mrs Warsimurni thinks Muhdawan and Rahmat are dead because she saw headless bodies floating down a river a couple of days later.

She said the women and children were released after they were forced to take off all their clothes and had their genitals inspected by a Christian leader, who claimed he was looking for witches. "I felt humiliated and afraid," Mrs Warsimurni said, "but the man said if you don't follow our orders you will be my enemy."

Now staying with her daughter in a refugee camp in the town of Palu, 200 kilometres north of Poso, she said she has no money and nowhere to go. "I haven't seen the bodies of my husband and son but I know they are dead." Christians in villages and towns south of Poso fear revenge attacks from Muslims.

In the town of Tentena, on the shore of the Poso lake, nearly every house that still stands has a cross painted on it, signifying the home of a Christian. Muslims have fled and their homes and businesses have been burnt down.

Asked whether Christians and Muslims of the area will ever again be able to live in peace again, Father Rinaldy Damanik, who heads a Christian crisis centre in the town, said: "That is difficult to answer. For instance, in Tentena it has never been difficult to build a mosque while it has been impossible to build a church in other places." He said the Christians were not seeking revenge. "We want the law upheld ... the authorities are against the Christians who are protecting themselves."

In the nearby Christian village of Kelei, people take turns watching for Muslim attackers. "We are monitoring closely," said a church worker, Ms Yustina Baretha. "We are fearful because the military swept through here and took all our traditional weapons, such as machetes. We don't trust the authorities to protect us."