Military authorities in East Timor have seized a cache of 20 homemade bombs and detained two rebels accused of planning to destroy the territory's capital, Dili, an Indonesian newspaper reported yesterday.

District military commander Colonel Slamet Sidabatur told a local newspaper the two suspects, Constancio Costa Dos Santos, 21, and a 23 year old whose name was only given as Paul, were arrested in Dili on September 15th.

Twenty home-made bombs capable of blowing a hole through a piece of steel 5 to 10 mm thick were confiscated along with 45 rounds of M-16 ammunition, the newspaper said, based on a report from the State Antara news agency.

The military cuold not be reached for comment.

Also confiscated were a tape recorder, a mobile phone, a video camera as well as 250,000 rupiah ($A 97) and letters from Xanana Gusmao destined for rebels hiding in the forests of East Timor.

Mr Gusmao, leader of the Fretilin group, is serving a 20 year prison sentence in Jakarta for plotting against the state and illegal possession of firearms.

Phots of the suspects having their picture taken with exiled East Timorese resistance leader Jose Ramos Horta were also said to have been seized, the newspaper reported.

Mr Ramos Horta was a co-recipient of the 1996 Nobel peace prize along with Bishop Carlos Ximenes Belo and is based in Australia.

Colonel Sidabatur said the two were being held for making the bombs, adding that the military was alo seeking a married couple holed up at the Austrian embassy in Jakarta, since seeking asylum on September 20th.

The commander said the military would try to have the couple transferred into military custody, adding the military would "clarify the problem and would also prove that the two were terrorists".

Col Sidabatur also said that an unidentified person from Australia came to Demak, Central Java, in March to teach the four suspects how to make the bombs and then left Portugal [sic] to meet Mr Ramos Horta and several others.

The military was also investigating the origin of the confiscated bullets, he said, adding that if any military were implicated "there would be no mercy".

The discovery follows several months of gueilla insurgency by the rebels opposed to Indonesia's rule of the disputed territory. On Friday five men went on trial over the deaths of 17 police officers killed when rebels allegedly threw hand grenades into the back of a police truck last May. There have also been several fatal gun battles between rebels and security forces.