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Quiet in East Timor on Indonesian integration day By Amy Chew

JAKARTA, July 17 (Reuters) - The 22nd anniversary of Indonesia's annexation of East Timor passed off peacefully in Dili on Friday as the territory's jailed guerrilla leader opened the way for direct diplomatic contact between Jakarta and Lisbon.

Hundreds of troops and police patrolled Dili, capital of the former Portuguese colony, to prevent a recurrence of the violence during anti-Indonesian demonstrations last month in which at least three people died.

In Jakarta, the territory's jailed guerrilla leader, Xanana Gusmao, offered a way out of a diplomatic impasse by saying he agreed Jakarta and Lisbon should be able to establish a form of diplomatic relations while he was still in prison.

``I agree that special interest sections between Portugal and Indonesia can proceed without me being released,'' he told reporters after meeting U.N. special envoy Jamsheed Marker in Jakarta's Cipinang prison.

A diplomat who closely follows East Timorese affairs said Gusmao's comments had a symbolic meaning.

``If they (set up special interest sections), it will be the first confidence-building measure they will have agreed to and it will help the atmosphere when they next meet... It is necessary for them to get some agreement to get a sense of progress being made,'' he said.

Nations without formal diplomatic ties frequently maintain so-called special interest sections staffed by their diplomats in friendly embassies.

Portuguese Prime Minister Antonio Guterres, in a meeting with Suharto in Bangkok in 1996, proposed special interest sections. But this fell through over Portugal's insistence that Gusmao -- serving a 20-year sentence for armed insurgency -- be released.

East Timor's Jakarta-appointed governor Abilio Soares said at a formal anniversary ceremony in Dili that the territory's 1976 integration as Indonesia's 27th province had been the wish of the people to free themselves from Portugal.

Indonesian troops invaded East Timor in December 1975 and the United Nations has so far refused to recognise its annexation.

Soares told about 500 civil servants and representatives of the police and military: ``Twenty-two years have passed and East Timor has become and inseparable part of the Republic of Indonesia.''

Ordinary East Timorese however were noticeable by their absence from the morning ceremony in the square in front of the whitewashed colonial-era governor's office bedecked with red and white Indonesian flags facing the seafront.

Marker said he had discussed with Gusmao Indonesian proposals for a settlement of the East Timor issue, a running sore in Jakarta's foreign relations for two decades.

Following the resignation of Indonesia's hardline president Suharto in May, his successor B.J. Habibie has proposed a special status for East Timor. Marker and Indonesian Foreign Minister Ali Alatas have said they were encouraged by Lisbon's response.

Diplomatic sources said ``special status'' appeared to include a broad measure of autonomy for East Timor, with Jakarta continuing to control defence, monetary affairs and foreign relations.

Talks between Indonesia and Portugal under U.N. auspices on East Timor's future have failed to make progress for more than 15 years. Diplomatic relations between the two countries were severed at the time of Indonesia's invasion of the territory.

Indonesian Foreign Ministry spokesman Ghaffar Fadyl said on Friday the ministry would be interested to see Lisbon's reaction to Gusmao's comments.

East Timor's most vocal anti-Indonesian spokesman abroad, Nobel Peace Prize winner Jose Ramos Horta, told Reuters in Lisbon from Cape Verde that he backed Gusmao on the special interests idea.

``I urge Portugal and Indonesia to proceed as expediently as possible...,'' he said. There was no immediate comment from Portuguese officials.

Marker arrived in Jakarta on Thursday and reported to Alatas on what he said was an encouraging response from Lisbon to Indonesia's proposals on East Timor.

Alatas said U.N. Secretary-General Kofi Annan had invited him and his Portuguese counterpart to a meeting in early August to discuss East Timor. The exact date had yet to be set.

Marker is expected to visit East Timor before he leaves for New York on Wednesday. But he said his programme was still being worked out.

Marker, who is also due to meet Habibie, possibly on Saturday, told reporters after meeting Gusmao he had raised the rebel leaders imprisonment with the Indonesian authorities.

East Timor attracted international in 1991 when nearly 200 people were killed by security forces following the funeral of pro-independence protester, human rights groups say. Jakarta's official death toll is 50.

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