Tiny East Timor, which becomes the world's newest nation on May 20, held its first trilateral talks with giant neighbours Indonesia and Australia and said peace was its priority.

"We do believe that the most important thing is really to work for stability and peace in East Timor as a way to contribute towards stability and peace for the region," Chief Minister Mari Alkatiri told a press conference after the discussions.

Indonesia's 24-year occupation of East Timor cost tens of thousands of lives. The territory's 1999 vote for independence and its violent repercussions soured relations between Indonesia and Australia.

The foreign ministers of Indonesia and Australia, Hassan Wirayuda and Alexander Downer, as well as Alkatiri, hailed the meeting as "historic" and said it was time to look to the future.

"This is an historic meeting," Downer said.

"Whatever the history between Indonesia, Australia and East Timor, this meeting represents a very substantial step forward in the relationship and makes a substantial commitment to regional stability and security."

Tuesday's meeting on Bali island precedes a regional conference on ways to combat people-smuggling. The trilateral meeting focused on transnational crime such as terrorism, people-smuggling and drug-trafficking as well as on building economic cooperation and refugee repatriation.

Alkatiri and Wirayuda expressed fears that East Timor could become a transit point for drug-trafficking.

Wirayuda said Australia had offered to host a second trilateral meeting in a year from now and Alkatiri said the top priority of the three-way meetings would be security.

"We are still a very weak country in terms of security and that's why we think that we need a lot of capacity-building in this area too," the chief minister said.

"First of all, to establish our own capacity to control our country, to control our sea and our border."

Downer welcomed an East Timorese proposal for a meeting of police forces from the three countries.

He offered 6.5 million Australian dollars (3.3 million US) to help repatriate some 60,000-80,000 East Timorese refugees from Indonesian West Timor. The money will help offset lost pension rights for people who once worked for the Indonesian government in East Timor and provide better repatriation packages.

Australia will also provide 8.5 million Australian dollars for 1.3 million people driven from their homes by Indonesia's internal conflicts.

Wirayuda said rich oil and gas reserves off the coast of East Timor were not discussed Tuesday.

The 1989 Timor Gap treaty, originally between Indonesia and Australia, was renegotiated last year between Australia and United Nations administrators in East Timor. It now gives East Timor up to 90 percent of tax revenue from Timor Sea oil and gas developments.

Wirayuda said the treaty was on the agenda at a bilateral Indonesia-East Timor meeting on Monday.

"For the most part, when we talk about what was formerly known as the Timor Gap, the issues are between Indonesia and East Timor," he told the press conference without elaborating.

Wirayuda had said Monday that talks would be held sometime in the future to settle sea borders between the three countries, including in the Timor Gap area.

The ministers stressed the potential for mutual economic benefits from enhanced cooperation.

Australia was one of the few countries to recognize Indonesia's annexation. During the occupation an estimated 100,000-200,000 East Timorese died violently or from starvation or disease amid a protracted guerrilla war against Jakarta's forces.

In September 1999 Australia led international peacekeeping troops into East Timor as it descended into chaos after the independence vote.