East Timor's notorious martial arts gangs are growing in size and strength and pose an increasing threat to Australia's security, a new report says.

The failure to curb criminal activities by the gangs could lead to Australia having to spend more money on aid and security in the fledgling nation, says the joint report from the non-governmental organisation Austcare and the Geneva-based Small Arms Survey.

It warns gangs responsible for the majority of the violence that plagued East Timor in 2006 are still active.

The report's author James Scambary says extortion and protection rackets in the country's commercial sector are exacerbated by the large number of foreigners contributing to the economy.

"The mass of foreign presence is providing a boom in construction, in hospitality, prostitution, gambling and a range of other activities so there's a lot of profits to be made," he said. Some of the gangs have links to larger crime syndicates in China and Indonesia, Mr Scambary says.

He warns the maritime border between East Timor and Australia is poorly policed.

"There is potential for drugs or weapons importation and various other things." Australia may be forced to make a long term police and military commitment to East Timor if the gang problem is not resolved, he says.