The BBC's Matt Frei reports: "Hatred rules on the streets of Dili"

Violence flared as marchers clashed with pro-independence supporters. Witnesses quoted by the French news agency said five people had been shot dead.

Meanwhile the Indonesian justice minister announced that the jailed East Timorese independence leader Xanana Gusmao would be freed on 15 September.

The minister praised Mr Gusmao's contribution to the settlement of the East Timor problem.

Crowds estimated at between 8,000 and 15,000 gathered in support of Indonesia's offer of increased autonomy for the territory, following a large pro-independence rally on Wednesday.

However, violence flared after a convoy of Jakarta supporters stoned a picture of Xanana Gusmao in Dili's Pekora district.

Independence supporters threw rocks at a truck, witnesses said.

Pro-Jakarta demonstrators attacked houses after a stone-throwing incident

A tense stand-off developed, as pro-Jakarta militiamen got down from their truck and burnt three houses. Witnesses say they then opened up with automatic weapons.

Indonesian police fired shots in the air to head off further clashes, according to UN officials.

BBC South East Asia correspondent Simon Ingram says the violence augurs very badly for Monday's referendum on the territory's future.

The police had earlier ensured that the demonstators were kept well clear of the seafront headquarters of the pro-independence National Council for Timorese Resistance.

This was the last pro-Jakarta rally before next Monday's referendum

The black T-shirts, face masks and sunglasses worn by many of the pro-Jakarta demonstrators marked them out as members of Aitarak, the most notorious of the pro-Jakarta militia groups bent on blocking East Timor's drive towards independence.

Later, at a football stadium across town, the Aitarak leader, Eurico Guteres, warned of "massive fighting" if independence is declared.

"If East Timor becomes independent, it will become a sea of fire," he told a cheering crowd at the stadium.

The Associated Press said that two of its reporters were assaulted at the stadium by pro-Jakarta activists.

Meeting

A pro-independence supporter waves a dagger after local houses were attacked

On Thursday morning a UN helicopter flew the commander of the separatist Falantil guerrillas, Taur Matan Ruak, from his jungle hide-out to attend a meeting with the Indonesian military commander in East Timor, Colonel Noer Muis.

UN spokesman David Wimhurst said the meeting lasted 75 minutes and was the first of its kind, although no further details were released.

The meeting came amid increasing fears about the security for Monday's vote.

Constancio Pinto of the East Timor Resistance Council talking to BBC News

The UN operation in East Timor, which is supervising the vote, says it is determined to continue with the referendum as scheduled although there was still "a lot of intimidation in a number of districts".

The UN has already delayed the vote twice because of security concerns.

Portuguese support

Talks are due on Thursday between Portuguese and UN officials at which the former colonial power is expected to underscore its readiness to provide financial and human support to East Timor in the event of a vote in favour independence.

The former colonial power is reported to have pledged to fund the entire budget of an independent East Timor for five years.

It is also expected to press for the release of East Timorese resistance leader, Xanana Gusmao, currently being held in Jakarta, so that he can take part in the vote.