Louise Williams Jakarta and Jenny Grant in Dili – A new offer from Indonesia to grant East Timor special status and release the jailed resistance leader Xanana Gusmao would provide only a transitional solution, East Timorese leaders warned yesterday.

Indonesia's President B.J. Habibie told Australian correspondents at the weekend that he would grant the contested province special status, arrange Xanana's immediate release, reduce the presence of Indonesian troops and offer guerilla fighters amnesty, all in exchange for United Nations recognition of Indonesian rule of the territory.

This is the first concrete compromise offer from Jakarta since the Indonesian invasion of the former Portuguese colony in 1975, sparking a conflict which locals say has cost 200,000 lives.

But independence groups warned of more trouble ahead if this was Jakarta's final offer. The secretary of the Dili diocese in the predominantly Catholic province, Father Domingos Siguera, said: "It sounds good. It is a real concession for which we've already waited too long."

However, he warned that special status could only serve as a transitional mechanism. "If that is the final status for East Timor there will be much more bloodshed and troubles," Father Siguera said after celebrating Mass at the home of the head of the Catholic Church in East Timor, the Most Rev Carlos Belo.

Student groups, who have staged a series of demonstrations in Dili calling for an internationally supervised referendum on East Timor's future, angrily rejected the offer as a ploy for Dr Habibie to win international legitimacy. A student leader, Antero Benedito de Silva, said: "It is not Habibie's right to give us special status, it is the right of the East Timorese to have self-determination through a referendum."

The Catholic Church and East Timorese independence groups are calling for an internationally supervised referendum to offer the people a choice between integration into Indonesia, the formation of an independent nation or federation with Portugal. The East Timorese are unlikely to accept the Habibie proposal as a final offer because their status in the UN is their strongest bargaining counter.

Xanana's sister, Ms Armandina Santos, said the offer to release her brother was a stunt to end the debate on the territory's future, and urged the UN not to consider the proposal without first sending an assessment team to East Timor. The exiled East Timorese resistance spokesman, Mr Jose Ramos-Horta, called the Indonesian offer "totally unacceptable".

However, analysts believe the offer reflects potential for movement on the East Timor issue following the resignation of president Soeharto last month. Already Indonesian troops have pulled back to their barracks and are allowing demonstrations in the province, which would have provoked widespread arrests and a military crackdown under the Soeharto regime.

Diplomatic sources said it was possible a solution could be worked out in which East Timor would remain within Indonesia, with Jakarta responsible for external defence and the East Timorese in control of internal administration.

Portugal has rejected the Habibie proposal. A government spokesman said that if Indonesia wanted to move towards democracy, the East Timorese must have the right to choose their own future. An internationally supervised referendum on integration, and direct negotiations between the UN and the East Timorese were "indispensable".

[According to a June 21 report by Reuters, Xanana was visited by the governor of East Timor, Abilio Jose Osorio Soares, last week and they were believed to have discussed the initiative. Gusmao has rejected the offer saying "There won't be a solution without a referendum. This is something the Indonesian government must understand. Only a referendum will guarantee a solution that is just as well as a stable and lasting peace". A June 21 report by AFP quoted Soares as saying "I have met with Xanana and he would also be very thankful for the opportunity of a dialogue". He also said "...nowhere in the world has a referendum ever solved problems... only dialogue has managed the task - James Balowski.]