Indonesia and East Timor have announced a joint commission to investigate the violence in East Timor four years ago, in which more than 1,000 people died.
East Timor's president wants better relations with Indonesia
The United Nations had been considering its own inquiry, but this initiative could make those plans redundant.
Few people have been punished for the violence, to international concern.
Local gangs, aided by Indonesian soldiers, waged a bloody campaign after a UN-organised vote which saw East Timor choose to split from Indonesia.
The decision to create the Commission on Truth and Friendship is reported to have been made when Indonesian President Susilo Bambang Yudhoyono met East Timor President Xanana Gusmao in Bali earlier this month.
The foreign ministers of the two countries - Hassan Wirajuda of Indonesia and Jose Ramos Horta from East Timor - then discussed the idea privately with UN Secretary-General Kofi Annan.
They announced the new commission on Tuesday, asking for international assistance to help it get started.
"This is an initiative that we believe is highly positive and will shed truth on the events of the past," Mr Ramos Horta said.
He added that the plan was an "unprecedented initiative in international relations" as it involved the participation of both countries.
Mr Wirayuda told the French news agency AFP that the commission was "meant as an alternative to the idea of
establishing a commission of experts by the secretary-general".
But he conceded that Mr Annan had not yet said whether he would go ahead with a separate UN inquiry.
Last month the UN expressed concern at Indonesia's failure to punish those responsible for the violence following East
Timor's independence vote in 1999.
Jakarta set up a special human rights court in 2000 to try military and police officers charged in connection with the unrest.
But most of the convictions have now been quashed, and international rights groups have questioned the court's effectiveness.
East Timor - which became an independent nation in 2002 - has played down the lack of convictions, and has instead stressed the importance of building good
relations with Jakarta.