Australian troops came under fire as they kept rival armed ethnic gangs apart today during hours of chaos and terror that sent thousands of East Timorese fleeing through Dili's smoke-filled streets.
It is the first time the Australians have seen gunfire since their peacekeeping mission started on Thursday.
It was unclear if there were any deaths, but AAP reporters helped soldiers on patrol move wounded civilians through a maze of alleyways.
The Australian troops were heavily armed but did not open fire.
Facing down masked gang members by shouting orders and threats, they helped many people – some of them wounded – escape to safety.
The gangs – from rival clans from the east and west of East Timor – fired assault weapons and set buildings and whole streets ablaze. Those without rifles carried machetes, spears and even bows and arrows.
An Australian army major, who asked not to be identified, said the gangs were using hit-and-run tactics to spread terror as well as loot.
He said they were tipping off one other with mobile phones about the whereabouts of Australian patrols.
Today's street fighting was the worst since 1999 when pro-Indonesian militia began a rampage of murder and destruction after East Timor voted for independence.
Like then Australian troops today found themselves struggling to overcome the mayhem.
At one stage they appeared overwhelmed. But reinforcements were moving quickly into the city this afternoon.
The major said the fighting was the "last big showing" by rival gangs before international troops secured the city.
"They know we are coming and this is their response," he told AAP. "We know who they are ... They can move faster that us, because we are weighed down by our equipment. But the big push is coming."
The fighting erupted when groups of eastern Lorosae and western Loromonu people clashed not far from the fortified United Nations headquarters in central Dili, where advance teams of Australian special forces are based.
The fierce communal fighting underscores the depth of the crisis in Timor. It had already been torn by days of gunbattles among pro and anti-government troops as well police.
As many as 23 people are known to have died in the past four days.
Backgrounding the bloodshed is a battle over political power between President Xanana Gusmao and Prime Minister Mari Alkatiri.
In recent days, Dili has been awash with rumours that some military factions have supplied weapons to civilian militias.
An Australian army team was sent to rescue terrified local residents trapped by the fighting in the nearby suburb of Tuan Alarang, where three homes were set on fire.
The soldiers conducted a house-to-house search, gathering together a small group of women and children, as well as one man who had been wounded by an arrow, and escorted them to safety amid bursts of automatic gunfire.
The fighting quickly spread to nearby areas as Loromonu gangs roamed the streets with machetes.
They were looking for rivals they accuse of monopolising top government jobs in the fledgling nation.
Hundreds of terrified people streamed towards the city's beachside embassy district, where a small group of Australian soldiers and police stood guard outside the Australian and US missions.
This afternoon scores of trucks carrying thousands of civilians were seen driving out of Dili towards the east under the protection of what appeared to be East Timorese military.
Smoke billowed into the sky from burning buildings as a pair of Black Hawk helicopters patrolled with machine guns trained on the streets below.
The troop carrier HMAS Kanimbla arrived off the Dili coast and began ferrying troops and armoured vehicles ashore.
More troops were being mobilised from the main Australian base set up at Dili airport, 10kms to the west.
Local people called for the Australians to accelerate their deployment to quell the violence.
"Where are the Australians?" asked one worried man, who identified himself only as Constantine. "They promised to save us."
Hundreds of people also fled to a group of churches at the edge of Dili's harbour.
This afternoon, two Australian armoured personal carriers and five truckloads of soldiers entered the city.
Outside the Australian embassy, Federal Police tried to maintain order as panicked local people fled amid rumours roving gangs were coming looking for victims.
"We are looking for protection from anyone," Laurinda Gomes, 52, said as she squatted in the sun outside the mission.
Another man Maksud Bangladesh called on Australian troops to be more aggressive and "should shoot the rebels".
In the upmarket Timor Hotel two gang members tried to wait inside for their clan enemies to come to the lobby restaurant, but disappeared when they were noticed.
In the suburb of Kudilarang Australian commandos had taken over a concrete police post to keep apart two communities of Lorosae and Loromonu.
Two burnt motorbikes lay on the ground as the Australians watchfully trained heavy machine guns on the surrounding streets.
The soldiers stopped a passing police car to ensure the officers inside were not seeking to join the bloodletting.
The Australians were aiming to have their full force of 1,300 combat-ready troops in place, backed by New Zealand and Malaysian soldiers, and eventually Portuguese paramilitary police by early tomorrow.