Dili – Rival parties in East Timor have failed to agree on the formation of a new government, the president said Tuesday (July 24th), raising the prospect of political deadlock in the tiny nation.

East Timor's ruling Fretilin party won the most votes in bitterly contested parliamentary elections in June following the ousting of the prime minister last year amid widespread violence, but fell far short of a ruling majority.

The party insists it has the right to head any new government, but is up against a coalition of rival parties headed by former president Xanana Gusmao that controls more seats in the legislature.

"All political parties have not yet reached agreement on a new government," said President Jose Ramos-Horta, who according to the constitution has the final say on its formation. He said a Wednesday (July 25th) deadline he had given the parties to come up with a compromise was "flexible."

Ramos-Horta has repeatedly urged the parties to form a national unity government amid fears that political tensions could again erupt into violence in the country, where tens of thousands still live in camps after last year's bloodshed.

Ramos-Horta said he would announce a new government by the end of the month.

A spokesman for the Gusmao coalition said if Fretilin formed the government it would go into opposition. Such a bloc would outnumber Fretilin, meaning it could vote to reject the government's legislative program, forcing fresh elections.

East Timor, which broke free from Indonesian rule in 1999 in a UN-sponsored referendum, faces major security, humanitarian and economic challenges just five years after it officially became Asia's newest state. Unemployment hovers at around 50 percent, and aid agencies have warned that a fifth of the population is threatened by food shortages after crop failures.