Lindsay Murdoch, Jakarta – It had been a disastrous few days for Kiki Syahnakri, the Indonesian military officer in-charge of West Timor. He may even lose his job over last week's murder of United Nations staff in the border town of Atambua.

As reports of more attacks on villagers continued to reach his temporary base in the provincial capital, Kupang, Major-General Syahankri's temper erupted. Asked about the killings, he snapped: "The deaths of villagers has nothing to do with me ... ask me about national security and I can answer."

In theory, Indonesia's armed forces have seen a drastic decline in their influence since the 1998 downfall of the Soeharto dictatorship. They have formally abandoned their dwifungsi, or dual function, doctrine that kept them the most dominant force in all aspects of Indonesian society for the 32 years of Soeharto's rule. This doctrine legitimised the role of the military in civilian affairs as well the defence of the country.

But when President Abdurrahman Wahid demanded answers and action in response to international outrage over the UN killings he turned first to the military, which continues to exert enormous influence. There is strong suspicion its special forces were behind the UN killings, which humiliated Mr Wahid while he was attending a UN peace summit in New York.

A just-released report by the International Crisis Group, headed by former foreign minister Mr Gareth Evans, says military officers – either on their own initiative or on instructions from higher levels in the military hierarchy – have engaged in activities that seem designed to undermine Mr Wahid's government.

"There are some indications of military resistance to government policy, especially in regions experiencing disturbed security conditions, such as Aceh, Maluku, West Timor and Papua (formerly Irian Jaya)," the report says. "Although not proven, it is widely believed in political circles – including at the highest levels of government – that some retired officers continue to influence serving officers to carry out activities, including the aggravation of social conflict, to undermine the stability of civilian government," it adds.

The report says the military is still strongly represented in the state and military intelligence agencies, which continue to focus on domestic political and social affairs. "The military, through business enterprises and other means, raises funds to cover about 75 per cent of its expenditures. These fundraising activities are generally not subject to public scrutiny: military commanders have access to large sums of money that could be used to finance future political manoeuvres."

The Brussels-based group recommends that foreign countries maintain the threat of sanctions and embargoes on Indonesia to discourage military coups. But the group says it is not possible for the military to regain control of the government in the near future. "It is far too fragmented to act cohesively. It lacks confidence in its capacity to provide answers to Indonesia's manifold challenges. And, most importantly, its leaders know that any attempt to restore its political power would almost certainly trigger massive demonstrations throughout the country which could easily turn into riots."

One of the main authors of the report is Australian Dr Harold Crouch, an expert on Indonesia's armed forces, who is the International Crisis Group's Indonesia representative.

The report's release comes as many countries review their policies towards Indonesia amid fears of a breakdown in the military's chain of command and concern it is still applying political pressure on Mr Wahid's government for non-democratic means.

"Although the military no longer plays a decisive role in the government, its withdrawal from participation in day-to-day politics has proceeded at an uneven pace and is not yet complete," the report says. The group's recommendations include dismantling, or at least drastically reforming, the army's territorial structure to reduce the capacity of the military to interfere in regional politics.