People began the day with prayers
About 80 nations are sending representatives to witness the birth of the world's newest country in a ceremony at midnight (1500GMT).
The BBC's Richard Galpin in the capital, Dili, says more and more Timorese people are pouring into the town for the big day.
More than 1,000 of them joined Dili's Bishop and Nobel Prize winner, Carlos Ximenes Belo, in morning prayers for peace and unity.
A diplomatic faux pas with the former occupier, Indonesia, nearly spoilt the festive mood but appears to have been resolved.
In a strong show of support for one of the world's smallest and poorest countries, guests include UN Secretary General Kofi Annan and former US President Bill Clinton.
Day of festivities
"The spirit within us has emerged and with that spirit we can shine and stand alone," said Bishop Belo.
At midnight, East Timor's flag will be raised and Mr Annan will hand over authority to the parliament leader, Francisco Guterres, who will proclaim independence.
President-elect Xanama Gusmao will then be sworn in.
The ceremony will be preceded by a mass as well as a cultural programme of singing and dancing.
Last-minute preparations continued through Saturday with veterans of the armed struggle against Indonesia parading through the streets of the capital as the new army of East Timor.
Vendors have been selling the new national flag and Independence Day t-shirts.
East Timor key facts:
"The international community has proved its generosity and solidarity," he told Portuguese TV.
"Despite the competition posed by other conflicts such as the conflicts in the Middle East and in Afghanistan, East Timor has still received a lot of support from the donor countries."
Asked what were the main challenges facing East Timor, Mr Horta said peace and security and job creation.
Warship scare
A last-minute diplomatic row with Indonesia appeared to loom when it dispatched six navy ships to accompany President Megawati Sukarnoputri, who is due to attend Sunday's event briefly.
Jakarta explained that the ships were needed as extra security for President Megawati but the ships withdrew offshore after a protest from the East Timorese Government.
Around 200,000 East Timorese are thought to have died under Indonesia's occupation of the former Portuguese colony, which ended in 1999 after a UN-organised referendum.
Mr Horta said he was confident that any future differences with Jakarta could always be resolved.
"The road ahead in our relations with Indonesia will be a bumpy one, but we are always able to resolve the differences," he said.