East Timor is at risk of becoming a failed state, just two years after winning independence, Oxfam has warned.
Oxfam is urging Australia to "play fair" with its smaller neighbour
It claims Australia is hampering East Timor's finances by laying claim to the lion's share of Timor Sea oil fields.
While Australia has been a "generous donor" it has actually reaped 10 times more in revenues from East Timor than it has given since 1999, Oxfam added.
Australia makes £1m ($1.7m) a day from a temporary deal granting access to two thirds of the oil fields, Oxfam said.
But, the charity argued, if a maritime boundary were set up between the two countries according to international law it would deliver "most, if not all" of these resources to East Timor.
The boundary has been a long source of conflict between the two countries, with energy deposits worth an estimated $20bn in royalties at stake.
Oxfam's report said tensions over access to the resources "stand to push East Timor to the brink of becoming a failed state through no fault of its own".
It also claimed the row threatens to "tarnish" Australia's support of the country over the past five years.
James Ensor, Oxfam Community Aid Abroad's director of public policy said: "The vast oil and gas reserves of the Timor Sea provide East Timor with a window of opportunity for providing for its people and future generations.
"However, Australia is not displaying good faith in its current negotiations with our neighbour."
The Oxfam report, released to coincide with the second anniversary of East Timor's independence, highlighted the current plight of the country where one in four people live below the poverty line.
It adds that the fledgling country is also facing a $30bn deficit over the next four years and is heavily dependent on foreign aid to deal with various needs such as health, education and infrastructure.
But that aid is expected to decline steeply in coming years - with Australia's contributions dropping 8.4% during the next financial year, it added.
Last month, East Timor's president Xanana Gusmao launched a fierce attack on Australia's attitude in its dealings with his country.
He said there had been an unequal struggle between the two - comparable to the Timorese fight for independence from Indonesia - over securing rights to the oil and gas resources.
Meanwhile, during negotiations between the two neighbours in the East Timorese capital Dili aimed at settling the dispute prime minister Mari Alkatiri accused Australia of unlawfully exploiting the resources of the sea between the two countries.
East Timor argues that the sea border between the two should be at the middle of the 375 miles of sea between the countries, in line with international laws.
However, Australia wants to keep the present border, at the continental shelf which at some places is just 94 miles from East Timor's coast.
Little was achieved during the last round of talks over the disputed territory - negotiations are set to restart in September.