Human rights activists have accused East Timor of putting diplomacy before justice after the fledgling nation agreed to drop charges against accused war criminals under a deal signed with Indonesia.

The United Nations, which oversaw East Timor's violent break away from Indonesian rule six years ago, has also criticised the accord.

East Timor's President Xanana Gusmao and his Indonesian counterpart Susilo Bambang Yudhoyono agreed to form a joint Commission of Truth and Friendship. It is to examine the wave of Indonesian army-backed militia bloodshed that followed East Timor's 1999 vote for independence from Jakarta.

The agreement, which followed three months of negotiation, was signed by both men during a ceremony at the Istana Negara state palace in Jakarta.

The 10-member commission will have a truth-telling function with the aim of establishing a "shared historical record" of human rights crimes before and after the independence ballot.

While more than 1,000 people probably died in the months before and after the 1999 vote, the panel will have no power to prosecute offenders. Instead, the five Indonesian and five East Timorese members will only be able to recommend amnesty for those who "cooperate fully in revealing the truth" during a two-year process due to start in August.

"The prosecutorial system of justice can certainly achieve one objective, which is to punish the perpetrators, but it might not necessarily lead to the truth and promote reconciliation," the document preamble said.

Gusmao, a former guerrilla leader who was held as a political prisoner under now deposed Indonesian dictator Suharto, has called for reconciliation. The deal reflected his public determination to seek closer diplomatic relations and avoid a bout of finger-pointing with his giant neighbour.

Privately his government is said to support international efforts. The Catholic Church, an influential power in East Timor, has warned the deal has little public support.

UN Secretary-General Kofi Annan last month called for a separate review into why a 1999 Security Council resolution to try those accused of war crimes failed.

Yudhoyono said relations between the two countries were developing positively since East Timor's independence. "We really want this friendship to last eternally," he said.

Gusmao pledged the commission would not pursue former Indonesian armed forces chief and indicted war criminal, General Wiranto. UN prosecutors allege Wiranto had command responsibility for "murder, deportation and persecution" committed during the 1999 violence.

"We will not be looking for suspects," Gusmao said. "We are not judges who have the right to pass sentence. In the spirit of friendship between the two countries, we will seek the truth."

An ad hoc human rights court set up by Jakarta has acquitted all but one official implicated in the violence with Indonesia refusing to act on arrest warrants against more than 300 others who sought sanctuary in Indonesia.

The human rights group East Timor Action Network said it was now up to the international community to pursue justice.

"The Commission of Truth and Friendship purports to provide definitive closure. The question is closure for whom?," ETAN said in a statement.

"The Commission of Truth and Friendship can only help provide closure to the Indonesian military's effort to avoid justice by enshrining their impunity." ETAN urged the UN to look at setting up an international criminal tribunal. "Timor-Leste's government may feel pressured by and vulnerable to its much larger neighbour, but that is no excuse to allow those who commit crimes against humanity to avoid accountability," it said.