Stephen Fitzpatrick, Jakarta – An East Timorese policeman was stabbed to death yesterday after security negotiations broke down in the western district of Ermera, where more than 600 rebel soldiers and police are defying a government call to return to their posts.

The death came as a senior minister resigned, citing his "failure to do anything" in the face of riots in Dili on April 28. "I resign today because of the situation several days ago that made people panic and paralysed the private sector," said Development Minister Abel Ximines.

In Ermera district, less than 50km west of Dili, a crowd of about 1300 people surrounded the car of a district secretary sent from the capital to discuss security concerns with the local regent. The Ermera area has been protected for the past several days by disgruntled armed police and soldiers demanding the sacking of Prime Minister Mari Alkatiri's Government and the disbanding of the country's military.

The crowd took the two officials and their five security guards hostage, and seized their weapons. They also burned three vehicles belonging to the party. A plan to seize the regent and co-opt his support has been an open secret in Ermera.

A tense stand-off developed, with the crowd demanding the deaths of all seven men and a group of senior ex-guerilla fighters urging calm. The senior leaders were among those who drafted the demands put to President Xanana Gusmao to fire his Prime Minister.

Their ultimatum, signed by the leader of the deserting soldiers Gastao Salsinha, threatened an armed response if their demands were not met, although they have also insisted they will delay military action until Government forces attack.

Yesterday's confrontation appeared initially to have been settled with the crowd agreeing to let the official party go free, before the group's driver panicked and drove off at high speed, throwing two police from the vehicle. Each man was set upon by a single assailant; one was last night being treated in a community health centre but the other, who was stabbed in the chest and head, died while being transported to Dili.

The Government continued to insist yesterday that the situation was returning to normal more than a week after riots convulsed the city.

Officially four people were killed in incidents following a demonstration by supporters of 591 sacked soldiers. However there are reports of many more people dying in targeted attacks after the military was given shoot-on-sight orders.

Thousands of people fled the capital last week on reports that the disaffected soldiers were ready to launch armed attacks in Dili in reprisal for what they have described as misuse of the military. Most of these people remain in the countryside despite the Government's assurances the capital is safe.