Eleanor Hall: Today marks two years since the creation of the world's newest nation, East Timor. But it seems the euphoria that accompanied its political independence from Indonesia has given way to anxiety about its long-term future.

There are warnings today that East Timor is perilously close to becoming a "failed state", unless it can find a way to secure financial independence from aid donor nations like Australia.

East Timor's leaders maintain that Australia could give its neighbour greater assistance, by renegotiating the maritime boundaries between the two nations, and so delivering East Timor greater revenue from oil and gas deposits in the region. But that's not a position the Australian Government is willing to adopt.

Nick Grimm reports.

Nick Grimm: Two years after the chaotic and violent birth of the world's newest nation, East Timor is now facing the problem of how to pay for the freedom it won through years of struggle against Indonesian rule.

The World Bank's representative in East Timor shares the concern.

Sarah Cliffe: It is critical. Without oil and gas revenues, Timor at least at this point does not have a resource base to exist as an independent state.

Nick Grimm: Asia's poorest nation faces the torment of knowing it can only survive with the benefit of foreign aid, despite the presence just off its coast of vast reserves of oil and gas.

It's so close, yet still far out of the reach for the East Timorese, unless it can gain the upper hand in the territorial dispute with Australia over maritime borders.

East Timorese President Xanana Gusmao.

Xanana Gusmao: We are familiar with this kind of long-term struggle. Of course, this is a different struggle we have to fight for. We are ready to keep fighting. We will never surrender. We will never give up.

Nick Grimm: East Timor argues the maritime border with Australia should be set at the halfway point between the two nations, giving it ownership of valuable oil and gas reserves.

But Australia has maintained the border should lie at the edge of its continental shelf, much closer to East Timor.

BBC NEWS EXCERPT: East Timor is two years old today, but it's embroiled in a row with its major donor, Australia, over oil.

East Timor spokesperson (translated): If Australia keeps cutting aid we'll face huge problems, we'll end up being just one more failed state, just one more country for whom independence proved to be just a dream.

Nick Grimm: East Timor has been ramping up the international pressure on Australia to renegotiate its maritime border treaty.

Prime Minister Mari Alkatiri.

Mari Alkatiri: Yes, it was a big surprise for me because I was expecting from Australia a different attitude being a democratic country that is always teaching rule of law everywhere, transparency everywhere, including in Timor Leste.

It was a surprise for me how a democratic country has this kind of performance as others when billions of dollars are involved.

Nick Grimm: Australia's Foreign Minister Alexander Downer is currently in Europe, from where he has hit back at East Timor's territorial claim on the BBC's Newsnight program.

Alexander Downer: First of all, East Timor makes claims that we don't accept and we have very long maritime boundaries with other countries, in particular Indonesia, and we're not shifting all of our maritime boundaries and abandoning very long standing principles of international maritime law.

And secondly, it's a curious principle that if one country is richer than another and the two countries are adjacent to it, the richer country should cede territory to the poorer country and on that principle, I suppose the United States should cede Texas to Mexico or something. I mean, it's not the way that the inequities on wealth are addressed.

Nick Grimm: And later Alexander Downer attacked those who have been calling on Australia to take a more generous position in the negotiations with East Timor.

Alexander Downer: It is also obvious that Australia isn't going to suddenly move all of its maritime borders with other countries in the teeth of a whole lot of emotional clap trap which is being pumped up through sort of left wing NGOs.

Eleanor Hall: Australia's Foreign Minister Alexander Downer, ending Nick Grimm's report.