East Timor is gearing up for its independence day
The ships were sent to accompany Indonesia's President Megawati Sukarnoputri as she attends celebrations marking the territory's independence.
East Timor broke away from Indonesia in 1999 after a referendum organised by the United Nations which sparked a wave of violence by the Indonesian military and pro-Jakarta militias. The territory has been administered by the UN since then.
Ahead of Sunday's celebrations, when the UN flag will be lowered, President-elect Xanana Gusmao said the improvement of living standards - not revenge - should be the new country's priority.
'Public relations failure'
"There was no such thing as a security arrangement. We did not agree for Indonesia to bring in six warships or so," said Mr Ramos-Horta.
He said only one ship would be allowed to dock, and Indonesian personnel would be allowed to remain on shore only if they were unarmed.
"We are not angry, just puzzled with this ostentatious display of navy hardware that obviously is not a good public relations exercise for Indonesia in the eyes of the Timorese and (of) major powers such as the US," he said.
The Indonesian ships have a large number of military personnel on board.
Indonesian officials have apparently requested that more than 100 be allowed to protect the president during the independence celebrations on Sunday night.
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Former US President Bill Clinton will also be arriving on Sunday, as will the U N Secretary General, Kofi Annan and Australian Prime Minister John Howard.
Their security contingents will be far smaller than that requested by Indonesia.
A BBC correspondent in the East Timorese capital, Dili, says that despite this diplomatic incident the East Timorese Government remains confident the Indonesian president will attend the ceremony.
Most of the navy ships have already moved away from the coast to international waters.
Mr Horta praised Mrs Megawati's political courage in deciding to press ahead with the visit, despite protests from members of her own parliament.
It is highly likely, our correspondent says, that elements within the Indonesian military are also opposed to her attendance and may be deliberately trying to spark an incident to force her to cancel.
Call for reconciliation
On Friday, the UN Security Council approved a new peacekeeping mission for East Timor, consisting of 5,000 troops and 1,250 police officers.
Mr Gusmao told a news conference that those responsible for the atrocities surrounding East Timor's 1999 vote for independence should be punished, but feelings of hatred and revenge should be eradicated.
"We must do our best to eradicate old sentiments of hatred and revenge... otherwise we are living with the ghosts of the past," he said.
He suggested that those who took part in the violence should be tried and jailed. But their sentences could be commuted for good behaviour, and offenders should be fully rehabilitated into the community, he said.
Mr Gusmao reiterated his desire to be a pumpkin farmer rather than president.
"But I promised I would go again and again to listen to them, to discuss their difficulties... hoping that five years later I can serve (them) a big pumpkin".
He said the people of East Timor fought for independence "to see their daily lives improve", adding that: "Right from the beginning we have many problems. We are the poorest country in Asia."