No injuries were reported, but gangs of anti- and pro-independence youths continued to roam the city streets, forming barricades with empty petrol drums, old furniture and tree branches to disrupt traffic. Sporadic gunfire was heard.
The Indonesian Foreign Minister, Ali Alatas, blamed the rioting on activists working abroad for East Timorese independence, saying it was another attempt to foment trouble in the former Portuguese colony. Indonesian troops seized the territory in 1976, after Portugal pulled out, but the United Nations still recognises Portugal as the administrative power. Most Timorese are Catholic and speak Portuguese, hindering their integration into Indonesia, the world's largest Muslim nation.
Most shops were closed and public transport stopped as the military responded to a call by the governor, Abilio Jose Osorio Soares, to end the unrest.
The trouble started on Tuesday, after police arrested a pro-independence activist, said a local council member, Manuel Carrascalao. Two men were stabbed to death and 18 people were injured in street fighting, Mr Carrascalao said. Five people have been arrested.
The fighting underscored the simmering tensions in East Timor, where pro-independence feeling is strong.
In Jakarta the armed forces spokesman, Brigadier-General Suwarno Adiwijoyo, said the situation in Dili would be easily controlled, and there was no reason to use excessive force.
Mr Alatas refused to comment on reports that Bishop Filipe Ximenes Belo, a critic of the government who heads the Catholic Church in East Timor, is among five nominees for this year's Nobel Peace Prize.
But he welcomed Australia's decision to deny refugee status to 18 East Timorese who landed in Darwin in May. Australia is one of the few countries which recognises Indonesia's rule over East Timor.