John Aglionby, Jakarta – The company of Indonesian soldiers was clearly very frightened. Two of their colleagues and one civilian were dead, three other soldiers and half-a-dozen civilians were badly injured; the ground was littered with spent cartridges.

The commander at the scene on the trans-Sumatran highway in Aceh said it was an ambush by separatist guerrillas. Civilian witnesses said there had been no assault – one army truck had ploughed into the back of another, and the soldiers, who had thought they were under attack, opened fire in panic, shooting randomly for several minutes.

The second version was by far the more credible. But the soldiers' fear is understandable. Poorly trained and underpaid – and therefore poorly disciplined – they are fighting their own side as well as the Aceh separatists.

Local newspapers are full of reports about "mysterious unidentified forces" perpetrating escalating brutality that threatens to become a major uprising. The generals deny such covert operations, but few believe them.

"I have no doubt there's a group using the current trouble in Aceh to create more chaos," says respected military analyst Salim Said. "There are many people who have a keen interest in keeping Aceh destabilised."

The reasons for this go back to the early 1990s, when the former dictator General Suharto gave the military carte blanche to crush the Aceh separatists. Those responsible include at least four current Cabinet Ministers. "They are afraid that the human rights problem will hound them if Aceh is allowed to become peaceful," says Said.

Aceh is only one problem among many facing the army in post-Suharto Indonesia. Since the strongman was forced from office in May 1998, the country's social fabric has begun to unravel, and the military – for 32 years the most powerful force in the country – does not know how to keep the country intact.

"For the past 32 years we effectively lived under martial law and the army only had to know the language of force," says Rizal Sukma, of Jakarta's Centre for Strategic and International Studies. "Soldiers did not have to be trained in any alternative methods of conflict resolution because they could do what they wanted and get away with it."

The consequences of this are apparent. The army is proving incapable of finding solutions to growing ethnic unrest. More than 100 people died last week alone on the eastern island of Ambon, and the death toll nationally this year is nearing 1,500. Under the military regime civil society was repressed, so there are now no civilian institutions sufficiently competent to handle the crisis. "People were kept stupid," says Munir, a human rights activist. "They were educated enough to follow orders but not to think for themselves."

Indonesia is now in a dangerous vicious circle. Generals admit past methods of repression do not work but do not want to cede political control. However, the military's continuing political presence – it still has 38 seats in the 500-member parliament – "is part of the problem not part of the solution," Sukma says.

Brigadier-General Rudy Supriata, a senior member of the military faction in parliament, denies that there is a problem. "We have been asked to be there by the people. There is a job to be done and the military is considered capable of doing it. We will leave when the time is right."

But most believe that following the referendum on East Timor – seen as a massive defeat for the Indonesian military – and with presidential elections due in November, military self-interest is winning out over altruism.

The military's involvement in the economy is another significant problem. "The Indonesian military is the most underfunded in the region," says Said. As a result, generals have gone into business. The military owns hundreds of businesses and its officers hundreds more.

Sukma says: "If we really want the military to be more professional we have to get them out of politics and out of business. This means the government needs to massively increase spending on military welfare. But that would be unpopular and is unlikely to happen until we have a strong government. However, we won't have a strong government until the military is out of politics. So we are stuck in a situation that will probably take generations to change."