Stephen Fitzpatrick, Dili – Mari Alkatiri was so confident he had stitched up the leadership of East Timor's ruling Fretilin party that by morning tea at the party's national congress yesterday he was belting out a melancholy nationalist anthem over the PA system, accompanied by an organist with a push-button rhythm machine.

It was the tipping-point moment, when a three-day national congress, designed to settle matters such as an agreed party history and a hoped-for national future, veered into vaudeville.

Two blocks away, at Dili's salubrious Hotel Timor, the Prime Minister's would-be challenger – suave diplomat Jose Luis Guterres, Dili's ambassador to the US and delegate to the UN – was officially announcing the withdrawal of his candidacy for the position of Fretilin secretary-general, the party's top job.

The Guterres team had lost a bid on Thursday to ensure voting would be by secret ballot, and was not prepared to continue with an "undemocratic" poll.

An open vote by show of hands, Guterres complained, would automatically reinstall Alkatiri as secretary-general – and therefore East Timorese Prime Minister – because delegates to the congress would be intimidated into backing the mercurial national leader.

Alkatiri and his team run East Timor with an iron fist, but they deny charges of intimidation. They also deny allegations of corruption, nepotism and mismanagement, although there is plenty of anecdotal and some documentary evidence of all these administrative and systemic failings in the fledgling Southeast Asian nation, still barely out of its birth pangs.

East Timor has access to expansive natural resources wealth and a pool of foreign donors willing to help with reconstruction after the decades-long disaster of Indonesian occupation, but many claim the Government is incapable of distributing the benefits of all this opportunity to the population.

The Government faces regular challenges from armed gangs, and more recently deserting soldiers and military police.

There could still be a violent reaction to Alkatiri's reappointment, just as there was a reception of rock-throwing and automatic weapons fire on Thursday night for the out-of-town delegates – that is, most of them – as they returned to their quarters in the city's west after a marathon late-night sitting at the congress hall.

Guterres's challenge was supposed to be about arresting East Timor's slide into potential Melanesian-style chaos, although one of his biggest problems was his unwillingness or inability to say exactly what alternative he was offering.

All he had in his election patter was a dislike of Alkatiri's "confrontational, domineering style", and a promise that he would be a leader who listened.

Admitting defeat yesterday and the possibility of payback from his "good friend" Alkatiri, the ambassador shrugged and said: "If the Government now decides that instead of attending meetings in New York I should enjoy some peace and quiet here in East Timor, then that's up tothem."

Insisting the Government "does not belong to Mr Alkatiri, but to Fretilin", Guterres defended his decision to stand. "I exercised my civic duty as a citizen of this country and as a former central committee member," he said.

That the Fretilin central committee wields supreme power in East Timorese civic life, like the politburo in some old-fashioned communist dictatorship, is hardly in dispute.

Fretilin is the only political force of any strength, and Alkatiri's style of rule involves playing the same sort of personality politics and appeal to popular self-sacrifice that historically wins guerilla wars.

The retired fighters of Falintil, Fretilin's military wing, who travelled hundreds of kilometres to be at this week's congress – women as well as men – still believe passionately in the cause for which they fought. Any lingering doubt would have been quickly quashed by the huge official congress banner featuring their late founding president, Nicolae Lobatu, in full guerilla gear, and by the singing of the Fretilin anthem Foho Ramelau each morning, with its rousing refrain: "There is a new dawn, See it over the village, See it over the nation; Awake, and take the reins, Rise, and free our nation."

There is no doubt Alkatiri had taken a firm grip on the reins well before he scaled the bleachers high in the dilapidated sports stadium yesterday to take the microphone for Timor Love, an Indonesian-era local ballad.

Victory was already assured at least 24 hours earlier, when the secretary-general put his stamp on proceedings with the surprise appearance, to thunderous applause, of Foreign Minister and Fretilin co-founder Jose Ramos Horta, an enigmatic figure with almost god-like status in Fretilin, but who left the party 15 years ago, citing the need to create a non-partisan national leadership.

Accompanied by a personal cameraman and an uptight Portuguese spin doctor, the grey-bearded and portly architect of independence lapped up Thursday's rapturous welcome, beaming and waving from side to side.

Ramos Horta's dramatic arrival at the Gedung Matahari Terbit – the Sunrise Building – was a purely symbolic moment at a gathering where party credentials and personal handbags were scrutinised in equally close fashion for three days.

But what a piece of symbolism, for a party where chimera has so often been more important than reality – from Fretilin's initial dream of achieving independence against all military odds to the curiously religious awe in which former guerilla leader-turned-president Xanana Gusmao is now held. There is a sort of cargo-cult mentality in the extent to which people believe Gusmao can fix the economic and social problems bedevilling East Timor.

A new war threatens to erupt from the hills unless the ageing President intervenes to sack his Government and call in UN troops, while competing business interests and development inaction from the central government contribute, in the eyes of many, to the continuing threat of rebellious military action.

So Ramos Horta's carefully timed entry to the congress, moments after the matter of electoral policy was settled (by a show of hands, as it happens), was a superb combination of myth and realpolitik.

In the view of most delegates, he played a vital role for decades as the diplomat who trod the world stage acquiring international legitimacy for their country, even as they were in the jungles and the mountains creating a homeland with their own blood, drawn by Indonesian brutality and bullets. His current campaign to lead the UN only increases his prestige.

Ramos Horta told the Fretilin faithful the most important thing they could fight for now was party unity in the name of the new nation.

"Whoever is elected at this congress, I will continue to serve East Timor," he declared to wild applause from a crowd that had little interest in supporting an untested challenge to the order of things.

Intimidation or not, they knew which horse they were being told to back. At that moment, Guterres knew he had lost. His applause for the Foreign Minister was in part an acknowledgement of Alkatiri's political masterstroke in producing such a powerful ally to cement the deal.

When the nominations were put forward yesterday morning, Alkatiri's candidacy was supported by 515 of the 586 delegates eligible to vote (under the rules, you need at least 10 per cent of delegates supporting your candidacy to stand for election).

The show of hands was a mere formality – on a district by district count Alkatiri and his presidential running mate, Francisco "Lu Olo" Guterres, took the floor with two votes against and nine abstentions.