Roy Callinan, Same – A few hours before dawn on Feb. 26, East Timor's most wanted man, rebel leader Major Alfredo Reinado, drove into the small town of Same, 50 km south of Dili, with about 70 armed supporters. Many residents of the town sympathized with Reinado, who has been a focus of anti-government feeling since he led a mass desertion from the Army last April. When he and his men took over a house on a hill overlooking the town, groups of young men wrote VIVA ALFREDO on walls, held a sit-in at the crossroads about 100 m below the house, and set up roadblocks on the streets leading up to it.

But East Timor's government was determined not to leave Reinado alone. Since he escaped from Dili's prison last August, the former military police commander – jailed over a rebel attack last May that left five East Timorese soldiers dead-had been flitting from one jungle hideout to another, giving interviews to journalists in which he vented his hatred for the "communist" government, and negotiating with officials and Australian peacekeeping troops over his terms for facing justice.

Then, last week, he and his men visited a police post on the border with Indonesia and left with 20 automatic rifles, along with ammunition and two-way radios. President Xanana Gusmao immediately authorized Australian troops-who make up half East Timor's 1,550-strong International Stabilization Force-to arrest him.

Six days later, five rebels were dead and one wounded, Reinado was still on the run, and East Timor's streets had become battlegrounds as thousands of the rebel leader's supporters staged angry protests, threw rocks and torched houses. Dili, the capital, was relatively quiet as Time went to press, but unrest triggered by the failed raid could resume with redoubled violence if Reinado is caught. Meanwhile, he continues to taunt the government, and has threatened to derail the April 9 elections-the country's first Presidential poll since independence in 1999.

Several hours after Reinado arrived in Same, Australian troops set up a cordon of checkpoints and roadblocks around his hilltop compound. Helicopters buzzed over the town and armored personnel carriers rumbled up the roads. "They were blocking the people," says Patricino dos Reis, a resident who sympathizes with Reinado. "It shocked us that they would carry out an operation while all the people were still in the town."

Reinado told journalists he would fight to the death. "If you bring all the forces and point guns at me," he warned, "I will shoot you." Gusmao and the commander of the ISF, Australian Brig. Mal Rerden, called on Reinado to turn himself in. "The purpose of this operation is not to kill anyone," said Gusmao. "It is to force them to hand in all the weapons they have and to surrender."

On March 3, more than five days into the siege, Reinado demanded a face-to-face meeting with officials. Soon after, East Timorese Attorney-General Longuinhos Monteiro, accompanied by Prime Minister Jos Ramos-Horta's personal secretary, walked up to the crossroads near the compound. But they returned from the negotiations empty-handed. Reinado reportedly told them he would testify at a tribunal investigating the gang violence sparked by his rebellion, but only if his own men were allowed to protect him. The Attorney-General refused his demand.

Later that afternoon, a Black Hawk helicopter began circling the hilltop. In the guesthouse at the crossroads, owner Elfrida Barros gathered her five children around her in bed. "I was thinking that the big helicopter will bomb us and kill us all," she told Time. Around midnight, she and other residents heard the sound of tramping boots. As soldiers moved toward the compound, the Black Hawk was joined by a second helicopter. At about 1:45 a.m., they landed in the corn patch tended by Jos Francisco and his family, 50 meters below the rebel compound. Francisco says he saw dozens of heavily armed soldiers emerge from the Black Hawks. Then he heard a loud explosion from the house followed by gunfire from the rebels, who were screaming obscenities in the local Tetum language. The Australians charged up the hill, killing two of the rebels. (A platoon of New Zealand troops also took part in the raid.)

Reinado's men deny shooting first, saying a machine gun in the helicopter fired into the house, forcing them outside. Ramos-Horta has claimed that one or more of the rebels fired at the approaching soldiers and were shot down. Barros and other residents say they heard pistol shots before the heavier weapons began firing.

Nelson Galucho, who was stationed in the compound's garden, says Reinado did not give the order to shoot until another rebel, Deolindo Barros, was killed. But less than 30 minutes after the gun battle began, the Australians – for reasons as yet unknown – stopped firing and pulled back, allowing Reinado and his surviving men to escape through the thick rainforest on the western side of the hill. Behind them they left the bodies of Barros, Natalino Pereira, Maranes Henrique and Calisto Tilman. The body of a fifth, unidentified man was found two days after the raid, but it was unclear whether he had died of wounds or exposure. Galucho's younger brother Nikson, a former military policeman who deserted with Reinado and was reportedly devoted to him, was shot in the leg, head and hand but survived.

At first light, a troop helicopter landed on the hilltop and loaded the bodies on board; they were taken to the shipping container that serves as a morgue at the hospital in Dili. The Australians also took Nikson to the hospital, where he is in a stable condition and under arrest. Deolindo Barras' sister spent two days trying to locate her brother's body before it was brought to the morgue in a black body bag by Australian soldiers. Barros – who left a pregnant wife and three children – was very close to Reinado, she told Time, "like a bodyguard."

"We don't have him," Rerden told the press in Dili, but he denied that the raid was a failure. As for the dead rebels, they were shot because "they posed immediate threat to the lives of the ISF members involved."

Gusmao said the hunt for Reinado would continue and again called on him to give himself up. Australian Prime Minister John Howard said of the rebel leader, "His continued activities are a threat to the security of East Timor, and it is preferable that that threat be neutralized. The objective is to take him into custody and that is an objective we will go on pursuing."

Meanwhile, news of the raid sparked violent protests, including an attempt by several hundred people to mass outside the Australian embassy. Demonstrators threw rocks at cars, set tires alight, and burned down several houses, including those of the Attorney-General and relatives of Gusmao. On March 8 Gusmao declared a state of emergency and put local troops back on the streets. Hearing of the development, rebel Nelson Galucho laughed and said: "The country's been in a state of emergency since last year." His leader, he says, has vowed to "liberate" the people of East Timor.

The spreading anarchy is triggering despair among many Timorese. "What has happened over the past year has destroyed the claim that this is a nation-building success story," says Laurentina Barreto Soares, a researcher with the UN Development Program. "Whoever wins the election could face even tougher problems than Xanana has."

One of those presidential candidates is Ramos-Horta, who says it's unfair to dismiss his country as a failed state so soon. "There is no civil war or bombs bursting on the streets," he says. "These are just growing pains of a young country." His main rival, Fernando de Araujo, leader of the democratic party and, like Gusmao, a resistance hero, disagrees. "We are a new country, but we are not a new society," he says. "Our people can see with their own eyes what has happened. It has been five years and what is there to show for it? Almost nothing."

[With reporting by Hannah Beech and Marcelino X. Magno/Dili.]