Fighting broke out between dismissed soldiers and the military near East Timor's capital yesterday, and neighboring Australia and New Zealand offered to send troops to help restore order.
At least two security forces were hurt in the clashes, one critically, with a gunshot wound to his head, said hospital official Americo Sarmento.
Dozens of people were arrested.
East Timor has been plagued by unrest since the dismissal earlier this year of 600 soldiers -- a third of the army -- after they went on strike, complaining of discrimination and poor working conditions.
The ex-soldiers, who threatened to wage guerrilla warfare unless they were reinstated, bunkered down in the hills surrounding the capital, Dili.
Police Major Domingos da Camara said some of the shooting yesterday appeared to be coming from their makeshift bases, while others said gunfire was heard in several parts of the capital.
"We have arrested dozens of people," he told reporters.
Australia, which led a UN-military force into East Timor after its bloody push for independence from Indonesia, said it was readying naval vessels, aircraft and even some troops.
"We've made it clear that we are ready to offer assistance to East Timor if it's needed," Australian Foreign Minister Alexander Downer told parliamentarians in Canberra, adding the military could also help with evacuations if needed.
New Zealand said about 30 of its troops were also on standby for deployment to East Timor.