An Australian peacekeeper has shot dead an East Timorese civilian during a clash near the capital, Dili.
The soldier was reportedly defending himself, after being attacked with steel arrows at a refugee camp.
There has been a recent resurgence of street violence in East Timor, and more unrest is feared in the run-up to presidential elections in April.
Canberra has 800 troops in the country, part of an international force brought in after factional fighting last year.
The clash happened on Friday morning at a camp near Dili's Comoro airport.
"During the incident, an ADF (Australian Defence Force) soldier was attacked with steel arrows, which are potentially lethal weapons," the Australian military said in a statement.
"He defended himself by shooting the attacker, resulting in the death of one Timorese national."
The ADF said it regretted any incident involving the loss of life, and added that the shooting was being investigated.
However a refugee spokesman said the violence happened when Australian soldiers tried to arrest people guarding a camp.
"They resisted by throwing rocks at the Australian soldiers, who responded with shots and came inside the camp using an armoured vehicle," Jose da Costa told Reuters news agency.
Australia has recently warned of the possibility of increased violence in the run-up to presidential elections in April.
In a statement, it said that areas around the airport and camps for internally displaced people could be particularly dangerous.
The presidential poll will be East Timor's first since it achieved independence in 2002, after 24 years of often brutal rule from Jakarta.
The country was blighted by serious street violence last year, sparked by the sacking of 600 soldiers in March.
This led to ethnic and gang violence which left at least 21 people dead, and caused tens of thousands of people to flee from their homes.
Mari Alkatiri resigned from his post as prime minister due to the turmoil, and was replaced by Jose Ramos-Horta.
The unrest prompted a call by East Timor's government for international peacekeepers, led by Australia, to help restore order.
On Thursday the UN Security Council voted to keep the UN Integrated Mission in East Timor (UNMIT) peacekeepers in the country for another 12 months.
The 15-nation council also approved the addition of another 140 police to the force, ahead of the presidential poll.