Mark Dodd, John Kerin – A sobering World Bank report warning East Timor's Government to tackle corruption or face civil conflict has been rejected by a "furious" Prime Minister Mari Alkatiri but warmly welcomed by public advocacy groups in Dili.

The 95-page report, obtained by The Australian, raises serious concerns about the level of expertise available in Dili to manage up to $40million a year in revenue from the oil-and-gas-rich Timor Sea.

The report says peace and stability in East Timor remain fragile, with the population becoming increasingly dissatisfied with the Government, a situation that could trigger civil conflict.

Attending an ASEAN summit in Laos, East Timor Foreign Minister Jose Ramos Horta, while admitting the situation was fragile, played down the World Bank report card on the world's newest nation, which is struggling to rebuild from the devastation wrought by Indonesian-backed militias in 1999.

"If you read it thoroughly, the World Bank report is very optimistic about East Timor," he said.

"They warn about the dangers but that's all. The Prime Minister is furious.

"We are doing very well, the country is very much at peace. We have a dynamic multi-party system – 12 parties in the parliament."

Cecilio Freitas, of the Dili-based NGO East Timor Peoples' Action party, which is running a public-awareness campaign warning of the dangers posed by corruption and nepotism, endorsed the report.

"Corruption is becoming a heartache for many in East Timor, especially corruption at Dili port and the Batugade border (with Indonesian West Timor)," he said.

"Senior Fretilin officials are also involved in peddling influence," Mr Freitas told The Australian, referring to the ruling party.

A spokeswoman for the World Bank described the report yesterday as "reasonably frank", saying East Timor was at a crossroads.

Australia, one of East Timor's biggest donors, runs an annual aid program worth $40 million.

Bruce Bilson, Parliamentary Secretary for the Ministry of Foreign Affairs and Trade, agreed East Timor faced serious challenges.

He said Canberra's primary aid focus was to help strengthen the country's institutions, especially public administration and the police. "East Timor is moving from a period of conflict to that of a peaceful, democratic nation," he said.