Sunanda Creagh, Jakarta – Security in oil-rich East Timor has greatly improved in the year since an attack on President Jose Ramos-Horta, but significant reform is needed to create long-term stability, a think tank said on Monday.

East Timor, which was invaded by Indonesia in 1975, has suffered from outbursts of violence and unrest since gaining full independence in 2002.

"When President Ramos-Horta was shot in February 2008, many feared Timor-Leste (East Timor) was falling back into violence. But the incident and its aftermath strengthened the government," the Brussels-based International Crisis Group (ICG) said in a report.

Australian media reported late last year the fledgling nation was on the brink of collapse, citing a leaked UN peacekeeping briefing, but the ICG said security in East Timor had "strikingly improved" in the last 12 months.

"Armed rebels are no longer at large. The atmosphere on the streets of Dili is far less tense. The government does not seem to be facing any serious political threat to its survival," the ICG said, while urging the government to strengthen the legal system, reform the military and police force, and curb graft.

In 2006, 37 people died and 150,000 were left homeless after a split between the country's military and police sparked fighting between Timorese from the country's east and west.

A group of rebel soldiers shot and wounded Ramos-Horta in February 2008, and attacked Prime Minister Xanana Gusmao on the same day. Alfredo Reinado, the rebel leader, was killed during the attack on Ramos-Horta, and his death encouraged insurgents to return to civilian life, helping reduce the violence.

Compensation for former rebels and refugees also helped resolve the unrest, the report found.

But "security sector reform is lagging, the justice system is weak, the government shows signs of intolerance towards dissenting voices and it has not got a grip on corruption", the ICG said in its report.

"These problems, which have been at the root of the instability facing Timor-Leste since independence, must be tackled if the country is to escape the cycle of conflict."

The East Timorese government should complete a comprehensive security review, as recommended by the UN Security Council in 2006, or else face the risk of "disdain for the rule of law and rejection of civilian control", the report said.

The think tank also warned that Ramos-Horta's tendency to issue presidential pardons sent the wrong message, suggesting that those involved in political violence, especially the elite, were above the law, while handing out compensation could lead to social tensions and create welfare dependency. (Editing by Sara Webb and Sugita Katyal)