Dini Djalal, Banda Aceh and Lhokseumawe – Aceh is a war zone. Children are so accustomed to explosions and gunfire they make a game of dropping to the ground to avoid injury.

Indonesian soldiers are helping the police build bunkers and rig anti-grenade nets in front of their posts amid daily shelling by rebels fighting for independence in this devoutly Muslim, resource-rich province on the northern tip of Sumatra.

In Lhokseumawe, home to the province's lucrative natural-gas processing plants, only combat-ready soldiers walk the streets after 9pm. Villagers say they're anxious that a military search for separatists could prompt another round of beatings by government troops or police. Aid projects are paralyzed – even though the "Humanitarian Pause," a truce intended to last until January 15, is supposed to facilitate aid. Even the authorities are afraid: Recently, police chasing thieves who stole a police car turned back when they neared territory held by separatists.

Government soldiers continue to battle with the rebels of the Free Aceh Movement even though negotiators in Geneva called a ceasefire in June, and agreed in September to extend it for three months as they pursue a political solution to the 25-year-old conflict. A spate of bombings, kidnappings and murders is jeopardizing the fragile trust that mediators are trying to build between the two sides.

Instead of preparing for peace, Aceh is preparing for tragedy. Leaders in Jakarta have offered autonomy to the rebels, known as GAM, and while GAM continues to fight for independence, the two sides appear closer on the autonomy issue. But such an agreement, many Acehnese fear, could bring more violence as a leadership struggle ensues between GAM hardliners, a more moderate breakaway faction and a criminal wing.

In this scenario, an autonomy deal would be signed by moderates and rejected by hardliners, and while the two fought it out, the criminal wing would continue extorting "taxes" from the local populace.

More than 120 people have been killed in Aceh since June, most of them civilians; at least 400 more have been tortured or kidnapped. Three aid workers were beaten by police in late August, prompting outside agencies, including USAID and Oxfam, to threaten a suspension of aid.

Provincial authorities claim that 60% of their regional offices no longer function, an unconfirmed statistic that is being used by military officials as an argument to declare a civil emergency and scrap the truce.

Ramli Ridwan, Aceh's Jakarta-appointed governor, agrees that the only way to reclaim the countryside is "with the strength of the military." Ramli's support for tough measures hints at Jakarta's fast-disappearing faith in dialogue and negotiation. New Defence Minister Mahfud Mahmudin claims GAM has used the truce as an opportunity to strengthen its hold on villages.

It was always going to be difficult to convince the two sides to accept the truce. Negotiators close to the military say the army leadership never agreed to it.

Moreover, the truce agreement provided no punishment for taking up arms. Col. Sulaiman Achmad Basyir, a military representative on the committee overseeing the agreement, admits the rules are weak. "It is not a formal truce but an understanding," he explains. Describing the violence as a vicious circle of revenge, Sulaiman is loath to tell soldiers to wait to be killed. "If our troops are attacked, we cannot order them not to chase their attackers."

Regional military chief Col. Syarifuddin Tippe blames the violence squarely on the rebels, claiming their handshakes are deceptive. "They may talk differently in the diplomatic forum, but the war continues."

Tippe claims the rebels leaders at the negotiating table have no control over their men in the field. Indeed, a military official recalls a visit by GAM commanders to the truce implementing committee's office in Banda Aceh, the provincial capital. The committee comprises representatives from GAM, the military and the Indonesian government, but the visiting GAM commanders barked at their colleagues "You don't represent us!" the military official says.

These allegations of disunity in rebel ranks are steadfastly denied by Abu Sofyan Daud, who commands rebel forces in Lhokseumawe. As black-clad recruits toy with AK-47s and Russian grenade-launchers at a remote hillside post, Daud tells the Review that his troops are "controlling themselves" at their base camps. If they strike out, he says, they do so in self-defence. "We don't look for trouble. Trouble comes to us." Daud blames the continued violence on the military, which he says has been pouring in reinforcements from all over Indonesia. He claims that in North Aceh alone there are 20,000 troops. Police say there are only 11,000 security personnel in the entire province.

After a decade of brutal military-led operations in the province, the police have formally been put in charge of security – but still get military help. Police spokesman Col. Kusbini Imbar admits that the force is overstretched and has to rely on the military for assistance and "war expertise."

In Lhokseumawe, where flames from the gas fields loom over ramshackle huts, GAM is as feared as the Indonesian security forces. Umi Kalsum's husband was killed in the late 1980s during the military's "shock therapy" campaign of killing and detaining thousands of GAM sympathizers. Yet she is more frightened now than ever, because now she fears everyone. "Before, at least you knew the military is behind the killings. Now the killers are always unknown," says Kalsum.

Amnesty International and Human Rights Watch have reported an increase in the targeting of humanitarian workers in Aceh in recent weeks, implicating police in many of the latest violations. But activists in Aceh suggest that GAM is also guilty of human-rights violations. "They act against civilians suspected of helping the government," says Aguswandi, of the Commission for Missing Persons and Victims of Violence.

More worryingly, the separatist movement is being wracked by a growing criminal element that is apparently succeeding in its efforts to impose a local form of taxation. Residents say each village household must pay 1,000 rupiah (12 cents) monthly to GAM; in towns, GAM collects up to 10 times that amount. Businesses are reportedly forced to pay millions of rupiah, depending on their size.

GAM commander Daud denies intimidation takes place. He doesn't deny, however, that the movement is well-funded. "People willingly give money to our cause," he says, claiming that 90% of the population want independence.

Many, perhaps most, Acehnese do want independence, but they dread being governed by what they view as a floundering leadership. GAM is comprised of several factions and has no structure, say analysts; that makes it difficult for local people to demand accountability – and for mediators to produce a comprehensive peace plan.

The result is confusion and disillusionment. Behind closed doors, the citizens of Lhokseumawe now scorn the rebels. "Our leaders have no education, only brawn. If we are given independence, we still won't be free," complains one woman.

Paranoia is rampant, and criticism is uttered in hushed tones, if at all. "The police look for GAM in the hills, but actually they are your neighbours," says Yusuf Pase, a human-rights lawyer in Lhokseumawe. Aid agencies have had trouble gaining access to villages, most of which are in GAM's hands, despite rebel promises of better access.

But all aid efforts could be derailed by the devastating scenario of all-out war. A local journalist echoes a warning by military intelligence of what will happen if peace efforts collapse: "After January, there will be no mercy." That vicious prospect may already have arrived.