"I have been given the task of uniting the people of East Timor in a determination to bring about a comprehensive, peaceful solution," he told reporters at his new home in central Jakarta. "I feel that with talks with East Timorese from all sides I can create an East Timorese nation."
The bungalow is designated a "branch" of Mr Gusmao's former home, Cipinang Prison, and the government refuses to refer to his change in status as "house arrest". But, despite being restricted in his movements, and guarded at all times by four prison officers behind a 10-foot fence, he will be free to receive visitors and phone calls and to participate in talks on the former Portuguese colony. "Xanana is here not only to sit but also to work, to help solve the problem of East Timor," said the Justice Minister, Muladi, who "welcomed" Mr Gusmao to his new home with a hand-shake.
East Timor was invaded by Indonesia in 1975 and annexed the next year. Few countries officially recognised Jakarta's sovereignty.
After 23 years of ignoring demands that it remove its forces, Indonesia created confusion last month when it said it was prepared to give the territory its freedom.
After talks with Portugal and the United Nations in New York this week, the Indonesian Foreign Minister, Ali Alatas, said that East Timor would soon be offered "autonomy" - control of many of its internal affairs, but not sovereign independence. If that is rejected, he said, Indonesia will withdraw, raising fears of a repeat of 1975, when the sudden departure of the Portuguese left a power vacuum.
This year has seen violent encounters between pro- independence East Timorese and supporters of integration, some of them vigilantes armed and trained by the Indonesian military. Despite the significance of the occasion, Mr Gusmao, whose years in prison have transformed him from a wild-looking guerrilla into a much more dapper and statesman-like figure, was far from jubilant and emphasised the difficulties which lie ahead. "If all sides do not want to reduce their enmity or their hostility, then the problem will become more and more difficult," he said.
"In my opinion, the priority now in solving the problems of East Timor is to create a peaceful climate."
There were chaotic scenes as the the 52-year old Mr Gusmao emerged into the drizzle from Cipinang Prison, where he had been since 1992, when he was arrested in East Timor and sentenced to 20 years' imprisonment. A dozen or so Timorese students waved flags in the rain and sang "Viva Xanana!"
But they were outnumbered by waiting reporters, who hopped on to motorbikes to chase Mr Gusmao's minibus and its escort truck of riot police at high speed through the streets of Jakarta.
After the convoy reached the house, there was a brawl as a crowd of Indonesian journalists tried to push past the police guarding the front door. A window was smashed in the crush of bodies. "Don't make us angry," snapped a furious young policeman, rifle slung over his shoulder.
A Portuguese reporter got past the guards by shouting "Let me through; I'm pregnant." She was, and they did.
Inside, Mr Gusmao sat on a sofa next to Mr Muladi, encircled by sweating reporters. Many supporters of East Timorese independence are sceptical about Indonesia's sincerity in discussing independence and he chose his words carefully. Asked if Indonesia might let East Timor go free, he said: "I have always been optimistic."
He told The Independent: "I'm not thinking about my own freedom. I'm only thinking about the work I have to do."
In the background was the sound of another window breaking as yet more reporters tried to get in.