In a BBC interview, President Habibie said the special status would be along the lines of that already existing within the Republic of Indonesia, and that he hoped that his offer would bring an end to the long-standing dispute on the status of the territory.

President Habibie's interview with BBC correspondent Jonathan Head

Mr Habibie also announced that ten East Timorese political prisoners would be released from jail. But he made it clear this would not include the leader of the fight for independence, Xanana Gusmao.

But the exiled vice-president of the National Council for the Timorese Resistance, Jose Ramos-Horta, rejected the offer on the former Portuguese colony.

Jose Ramos-Horta gives his reaction

Nobel peace prize winner Mr Ramos-Horta told the BBC that Mr Habibie's offer was nothing new and it only aims to convince the UN to recognise Indonesia's annexation of East Timor.

The Timorese people, he said, want Indonesia's withdrawal from East Timor and a referendum to decide for themselves on the future of their country.

Indonesia invaded East Timor in 1975, but its annexation announced the following year has never been recognised by the United Nations.

Negotiations on the future of the territory have been carried out under the auspices of the UN over the past 16 years but have so far made little progress.