Hamish McDonald – In Timor there is the politics of Dili – this lethargic little seaside capital of low white buildings and tall tropical trees, where Portuguese-speaking political leaders drive from meeting to meeting in dark-windowed luxury four-wheel-drives, followed by carloads of bodyguards.

And there is the politics of the mountains, where bands of armed renegades, mostly speaking the common Malay-Portuguese patois of Tetum, sit in occupied properties high above the sea, trying to parlay their moments of notoriety and threat into political and personal concessions from those below.

This week, the two forms of politics collided and merged. Armed rebels and and two of the most senior and revered politicians joined in a single attack.

The immediate target was to oust the Prime Minister, a small, angular man called Mari Alkatiri, who has held a whip hand over the Government in this nation of 970,000 people since it was launched into independence by the United Nations four years ago.

Beyond that, there is a struggle against a bigger monster, Fretilin, the ruling party behind Alkatiri occupying 55 of the 88 seats in the country's parliament, the dominant seat of power under the country's Portuguese-style constitution.

Believing the party was on its way to becoming more powerful than the state itself, the President, Xanana Gusmao, and the Foreign Minister, Jose Ramos Horta, the two-best known figures from the struggle against the 24-year Indonesian occupation that ended in 1999, have set out to diminish and tame it. Both once belonged to Fretilin.

Ramos Horta was one of its young founders in 1974-75 in the brief upsurge of local politics between the democratic revolution against fascist rule in the distant imperial capital of Lisbon and the Indonesian invasion. Gusmao took over its armed resistance wing, Falantil, after its first chief, Nicolau Lobato, was killed in 1978.

By the early 1990s, both had left, to make alliances with the more conservative Timorese elements who had tried to work with the Indonesians and who, disillusioned with that experience, saw an opening for independence in post-Cold War international politics.

Instead of the quasi-Marxist regimes formed out of violent liberation struggles in Portuguese Africa, their friends were to be found in the parliaments and church councils in the Western democracies. Ramos Horta simply quit the party and continued the diplomacy that eventually won him a joint Nobel Peace Prize with Dili's stubborn Catholic bishop, Carlos Belo. Gusmao took the entire Falantil with him.

After four years of watching Fretilin run the new country, culminating in the disastrous violence of April and May when the army and police fell to pieces and Australian-led peacekeepers were called in, the two leaders are now on the attack against their former party.

Their thinking is that once Alkatiri and his authoritarian clique, who were exiles in Mozambique, are prised from office, and the United Nations is called in to supervise parliamentary elections next April, they will launch a new, inclusive political party. This, they hope, will recapture the spirit of the all-party National Resistance Committee, which guided the East Timorese through the massive intimidation of the Indonesian authorities and their militias to a successful vote for independence in 1999.

The objection is not so much to the way Fretilin is running the economy. Marxist it is certainly not. The past four years have seen austere budgets, and if anything an over-careful husbanding of the first oil and gas revenues coming from the Timor Sea, which Alkatiri has placed in a Norwegian-model petroleum fund invested with the US Federal Reserve. "These are the best little bunch of neo-liberals you could wish for," said one foreign aid official.

The perceived fault is more Fretilin's Leninist organisation, its squeezing of the weak opposition parties, its nepotism and its pervasive contract padding and kickbacks, though even his opponents concede that Alkatiri is clean. With the independence mood of "Ita mos bele" ("We also can do it") now dissipated, along with the prosperity generated by UN spending from 1999 to 2002, moderate voters would desert Fretilin, leaving it with a rump of diehard radicals. "My sense is that if the election is free and impartial, they would not even cross 40 per cent of the vote," says Joao Mariano Saldanha, an American political and economic analyst advising Gusmao.

But first, Alkatiri. By Tuesday this week, Gusmao and Ramos Horta had closed what they hoped was a fail-proof trap. Since May, they had been aware of what seemed like a fatal overreach by the Prime Minister and the even more disliked former interior minister, Rogerio Lobato, long known to both as a dangerous character trading on his cachet as the brother of resistance leader Nicolau and his own hot temper.

In 1978, with Ramos Horta's then wife Ana Pessoa and young son as hostages, he had lured the envoy back from his annual vigil at the UN General Assembly and kept him prisoner in Maputo in Mozambique for "compromising the independence struggle", at one point lunging at Ramos Horta with a pair of scissors. Eventually, Mozambique authorities intervened.

In 2002, Lobato blackmailed his way into Fretilin's new cabinet by stirring up disgruntled former guerillas like the charismatic "L-7" who had not been inducted into the new 1400-man army. Their threats and blockades ended when Lobato was inducted into the government as interior minister, putting him in charge of the 3500-strong national police. "It was like appointing Al Capone to run the bank or Imelda Marcos to run the shoe factory," said one source close to Ramos Horta and Gusmao. As evidence gathered this week by the Herald showed, Lobato immediately began turning the barely trained police into a rival force to the army, which remained politically neutral with the president as nominal commander-in-chief.

A range of special units were formed, and orders placed for high-powered assault weapons and vast quantities of ammunition. The police commander, Paulo Martins, who had been a colonel in the Indonesian police, was soon at loggerheads with Lobato over the way his force was supposed to support Fretilin.

Events of the past few months are still murky. Why were complaints in the army ranks, by young recruits from the western part of the country about taunts and discrimination by old resistance veterans, mostly from the east, allowed to fester until 591 of the soldiers were led out of their barracks by an officer under a cloud over a smuggling incident? "There was mistake after mistake," says Mario Carrascalao, a leader of the small opposition Social Democratic Party. "A small problem became a big problem."

The soldiers were dismissed in March, and then brought their grievances to Dili, sparking riots on April 28 which saw the army fire on civilians. In May, Alkatiri manoeuvred against a leadership challenge in Fretilin headed by Jose Guterres, Timor's ambassador in the United States, at Fretilin's five-yearly congress. Always the sharpest reader of the rule book, Alkatiri got delegates to agree to an open vote, counting on the climate of fear and official favour in party ranks. Guterres withdrew, and Alkatiri was reaffirmed almost unanimously.

But in following days, Dili lapsed into violence again after dissident military policemen under their commander, Major Alfredo Reinado, started firefights with army units, while deserting police and the dismissed soldiers took control of the western coffee growing centres of Ermera and Gleno.

Then Gusmao became aware of a mysterious third force joining attacks on the army headquarters at Tacitolu, on the outskirts of Dili, on May 24 and 25 in which 11 assailants and soldiers died. As well as Major Reinado's troops, there were mysterious men in badgeless green uniforms, armed with Heckler and Koch 33 automatic rifles like those donated to the police by Malaysia.

Their leader, a local Fretilin organiser and former Falantil guerilla named Vicente da Conceicao, or "Commander Railos", was ready to talk.

With four of his 30 men killed by the army, Railos told Gusmao his group had been armed by the police after a meeting on May 7 with Alkatiri and Lobato, at Alkatiri's house. The Prime Minister and interior minister asked them to form a secret Fretilin security force to intimidate political rivals.

By coincidence or not, the ABC's Four Corners program was also on the case, assembling damning footage of Railos and his ease of contact with Lobato, and releasing a small taste of the documentary eventually broadcast last Monday.

Gusmao had been in contact with Railos several times before, and on Monday dispatched Ramos Horta to take a formal statement from Railos, who by then was singing his story to all-comers, at his group's camp in an old Portuguese mountain fort at Baibao, close to Fazenda Algarve, the Carrascalao coffee plantation.

After a colourful welcome that included a line of cutlass-wielding warriors, rows of men in leather sombreros and women in their best floral sarongs and blouses, and a formal guard of Railos's men, presenting arms with their illegal HK-33 rifles, Railos handed Ramos Horta impeccably printed documents on the group's alleged dealings with Alkatiri and Lobato, in detail down to the serial numbers of the weapons, vehicles and uniforms supplied by the police.

On Tuesday, the Prosecutor-General, Longuinhos Monteiro, issued arrest warrants against Lobato, bringing him before a judge on Thursday to face charges attracting a maximum 15 years' jail.

Gusmao, meanwhile, delivered a letter to Alkatiri. "After seeing the Four Corners program, which enormously shocked me, there is nothing left for me to do except give you the choice," he wrote in Portuguese. "Either you resign, or after hearing the Council of State, I will dismiss you because you no longer deserve my confidence."

But after reeling from the President's threat, and strong criticism in the Council of State on Wednesday, Alkatiri regrouped. The links between him and Railos were tenuously demonstrated, any criminal charges would rely on Lobato's evidence.

Facing a stubborn Alkatiri, Gusmao played what may be his last wild card. On Thursday night, he ended a two-hour televised tirade against Fretilin with a new ultimatum: if Alkatiri did not resign or the party begin moves to sack him, Gusmao would resign himself. "I am ashamed of all the bad things that have happened," he said, adding he "didn't have a brave face to show the people".

But shame may not count in this island's unforgiving political culture.