Mr Habibie - who last month replaced his ousted mentor, President Suharto - suggested this week that he was ready to offer East Timor "special status". But the East Timorese scornfully rejected the offer, which they regard as a sham.
Thousands demonstrated yesterday in Dili, the capital of the former Portuguese colony, which was invaded by Indonesia after the Portuguese withdrew in 1975. Buses packed with students drove in a convoy through Dili, shouting slogans in support of self-determination.
The justice minister said yesterday that President Habibie had signed a decree, according to which 15 East Timorese political prisoners would be released "as soon as possible".
But the list of those due to be released does not include the best-known prisoner, rebel leader Xanana Gusmao. Protesters yesterday chanted "Release Xanana", and unfurled banners with his image on.
The armed forces yesterday kept a low profile, but fear still runs deep. Dozens of people were killed when the army opened fire on a protest march in 1991. The Indonesian occupation of east Timor has never been internationally recognised.
Mr Habibie's latest proposal is a clear advance on the uncompromising position of President Suharto, who argued that any special status for East Timor would be unacceptable.
But Jose Ramos-Horta, the Nobel-prizewinning leader of the East Timorese opposition, insisted that Mr Habibie's offer was "not a serious proposal".
He declared: "I am stating unequivocally that we reject it." Mr Ramos- Horta argued that Indonesia was "rehashing an old position, which requires first that the United Nations recognise the illegal annexation of East Timor by Indonesia".
The Portuguese government was equally unimpressed. A foreign ministry spokesman suggested that Mr Habibie's declaration "demonstrates the inflexibility of the Jakarta government and does not permit any progress in negotiations".
The pressure for change throughout Indonesia remains strong. Student protests have continued since President Suharto's resignation. In East Timor, one pro-independence activist said this week: "The path is half- open. We feel freer to express our ideas."
The pattern of dictatorships elsewhere has been that once change has begun, it has been difficult for the authorities to put a brake on reform. That is the dilemma Mr Habibie now faces.Reuse content