Lindsay Murdoch, Jakarta – On many of Jakarta's balmy evenings, the plush suburb of Menteng looks like a battlefield as protesters fight police blocking them from the house with the red tile roof at No 8 Cendana Street.

And if Soeharto, Indonesia's disgraced former president, peered over the front fence he would see the swirl of tear gas, rocks and petrol bombs. The country he has turned his back on doesn't resemble Beirut of the 1980s or Belfast – yet. But, two years after his downfall amid widespread bloodshed, Soeharto is still causing mayhem.

A court's decision on Thursday to dismiss corruption charges against him on the grounds he is too ill to stand trial provoked more street battles. It also plunged the country into a new and dangerous phase of its transition from dictatorship to democracy. Adding to the danger is the prospect of a new wave of protest over a 12 per cent rise in the price of fuel this weekend.

The court decision greatly undermines the credibility of President Abdurrahman Wahid as his hold on the country steadily weakens. It is also a major setback for the Government's efforts to bring Soeharto, his family and cronies to justice for massive corruption during his 32-year rule. "Since the dismissal was due to health problems, other parties cannot take Soeharto to any court in the future," said his lawyer, Juan Felix Tampubolon.

Even before the decision the public's confidence in Mr Wahid's ability to govern had hit rock bottom amid a series of bombings he blames on Soeharto's family, stalled economic recovery, palace scandals, communal and separatist violence and back-tracking on efforts to reform the discredited and demoralised armed forces.

The court decision "shows that the Government is not serious in fighting against corruption, collusion and nepotism", said lawyer Todung Mulya Lubis, who successfully defended Time magazine from a libel suit by Soeharto early this year.

A Soeharto conviction would have been symbolic of the return of the rule of law across the archipelago. It will now be difficult, if not impossible, for the Government to pursue the Soeharto family or its cronies through the corrupt and politicised judicial system Soeharto left behind. If you believe his lawyers, Soeharto has been reduced to a feeble, depressive man whose mental and intellectual capacity has been debilitated and he spends his time doing little more than feeding his chooks in the backyard. But few Indonesians do.

And many analysts saw the trial as only a half-hearted attempt at justice. The charges related to the stealing of $A1.07billion from charities Soeharto set up when in office. But the Government estimates the family's ill-gotten fortune at more than $A60billion.

No real attempt has been made to force the family to return money to the state. Many people felt that even if Soeharto were convicted, the case would have had little significance in revealing the truth of his rule. Mr Wahid has indicated his support for the setting up a South African-style truth commission but like so much else in Indonesia, little is moving on the idea.

Anger over the court decision will probably be softened when Soeharto's youngest son, Tommy, goes to jail after being convicted over land corruption. But as the Jakarta Post said in an editorial, the decision to abandon the case against his father has caused "untold irreparable damage to the nation's quest for truth and justice, to the nation's struggle to wipe out corruption and, most of all, to the credibility and public standing of the Government of Abdurrahman Wahid".