Indonesian President Susilo Bambang Yudhoyono has visited a cemetery in East Timor where Indonesian troops killed hundreds of protesters in 1991.
Mr Yudhoyono said he hoped for warmer ties with 'an old relative'
The visit, the first by an Indonesian leader to the graveyard, is seen as a symbol of reconciliation after East Timor's 1999 breakaway from Indonesia.
On Friday, he signed a border agreement which both sides described as a good step towards normalising relations.
Some 1,500 people were killed when the tiny country voted for independence.
The president prayed at the cemetery where a peaceful commemoration of an activist killed by the Indonesian military turned into a bloodbath when troops opened fire on 3,000 people.
More than 200 were killed and about 270 went missing.
Mr Yudhoyono later on Saturday visited a nearby graveyard where hundreds of Indonesian troops killed during the occupation are buried.
"East Timor is like an old relative," he told the East Timorese parliament.
"I hope that the atmosphere of this trip can be maintained and translated into closer relations in the future."
The two countries have also signed an important agreement to formalise the border between East Timor and Indonesian-controlled West Timor.
"Our two nations have been able to reach a provisional land border agreement after less than five years of talks," East Timor's Prime Minister Mari Alkatiri said.
"This is a great achievement in its own right and it bodes well for making progress on other fundamentally important issues."
But while the visit marks a step forward in the relation between the two countries, many in East Timor feel that justice has not yet been done.
Indonesia set up a special human rights court in 2000, but has so far refused to extradite those accused of responsibility for the massacres.
Of 18 people it has tried in its own courts, 17 have been acquitted and one is still free while his case is being appealed.
The BBC's Tim Johnston says that despite the visit, the wounds in East Timor are far from healed.
Indonesia invaded the former Portuguese colony in 1975, starting an occupation which lasted almost a quarter of a century.