Don Greenlees – Xanana Gusmao was willing to accept house arrest, an East Timorese resistance leader said yesterday after Indonesian authorities had "tested the water" over transferring him out of Jakarta's Cipinang jail.

But Indonesian Justice Minister Muladi has poured cold water on the proposal to place the jailed leader of the Fretelin resistance movement under house arrest, maintaining there was no legal basis for such a move. "There is no such law in Indonesia," Mr Muladi was quoted as telling Indonesian television.

The comments come after The Australian reported that Foreign Minister Ali Alatas raised the option of house arrest for Mr Gusmao at a meeting of the Indonesian Cabinet.

Diplomats said yesterday that President B.J. Habibie and Mr Alatas had privately signalled they were prepared to move Mr Gusmao out of prison so that he could more directly engage in negotiations with the authorities over the future of East Timor.

Although the proposal appeared to be still under consideration, they said the Indonesian Government faced difficulties in resolving legal stumbling blocks and might want to extract further concessions from the East Timorese and the former colonial administrator, Portugal, before proceeding.

Negotiations between Indonesia and Portugal on an autonomy plan for East Timor are due to resume at the UN in New York next week.

A member of the National Council of Timorese resistance, Joao Carrascalao, said Mr Gusmao had been approached in prison by a respresentative of the Government to discuss Mr Alatas's proposal. "He (Mr Gusmao) was quite willing to accept that," Mr Carrascalao told The Weekend Australian. "It was probably just an approach to test the water and see his reaction."

Government sources said Mr Muladi had official carriage of any decision to change Mr Gusmao's status. He began serving a 20-year sentence in 1992 for leading resistance to Indonesia's 1976 annexation of East Timor.

Mr Muladi had earlier raised concerns about "technical difficulties" in implementing Mr Alatas's suggestion. A spokesman for the Indonesian Foreign Ministry has played down the prospects of any immediate change to Mr Gusmao's situation.

"So far we have no plan from jail to another place. In fact, Xanana would be better off if he stayed in prison where he could continue with his activities such as painting," the spokesman was quoted as telling the Indonesian Observer newspaper.