Hundreds of gang members battled with guns and machetes in East Timor's capital Dili today, officials and witnesses said, killing one and injuring two. A young man was shot dead near the city's largest mosque, apparently by a rival gang member, before UN police intervened, said UN police spokeswoman Monica Rodrigues.

It was the latest violence in the nation of fewer than a million people, where unrest killed dozens and toppled the government earlier this year. Foreign peacekeepers restored relative calm in June, but sporadic violence has left more than a dozen dead in recent weeks.

"We know a firearm was seen in the crowd," UN police spokeswoman Monica Rodrigues said. "The firearm was used to shoot at rival gang members."

She countered claims by a witness that UN police had shot the gang member. Raimundo do Reis Pinto, 20, said he saw UN police from Bangladesh "shoot my brother", but Rodrigues denied that that the police were at the scene when shots were fired.

Dili National Hospital supervisor Zony Santos said a man had died of gunshot wounds after arriving at the hospital and two others were injured. East Timor was thrust into chaos in April and May following the sacking of 600 soldiers by then Prime Minister Mari Alkatiri.

Rival police and army factions battled in the streets and clashes later spilled over into widespread gang warfare, looting and arson. At least 37 people were killed and 155,000 fled their homes in the capital, Dili, amid the violence – a sign of continued political instability seven years after independence from Indonesia.

Australia led a force of 3,200 foreign peacekeepers to East Timor in late May after the tiny country descended into chaos following the sacking of 600 mutinous soldiers. The territory of around a million people voted in a 1999 referendum for independence from Indonesia, which annexed it after Portugal ended its colonial rule in 1975. East Timor became fully independent in 2002 after a period of UN administration.