The two countries agreed to hold in-depth talks on Indonesia's proposal for a special status for the province which was a Portuguese colony till 1975, said a communique released yesterday by Annan at a joint press conference with the foreign ministers of Indonesia and Portugal.

The carefully-worded document did not refer to demand for referendum, but agreed to involve East Timorese more closely with the talks. Till now, Portugal has insisted on self-determination for the province, while Indonesia wanted the right to consult East Timorese leaders of its own choosing.

``We will start our discussions and hope that we can come to some understanding before the end of the year,'' Annan said. The ministers also welcomed the Secretary General's intention tointensify consultations with the province's representatives in East Timor and outside to hear their views and keep them abreast of the developments in the tripartie talks involving Portugal, Indonesia and the UN.

The next meeting is expected before the end of September under the chairmanship of the Secretary General's special representative, Jamsheed Marker of Pakistan. Meanwhile, an Australia-based East Timorese group has welcomed progress in talks between Indonesia and Portugal on the troubled territory but insisted that a referendum was the only solution for East Timor.

``ETISC is of the view that a real and permanent solution to the 23-year conflict can only be achieved if the wishes of the East Timorese people are respected,'' the Darwin-based East Timor International Support Centre (ETISC) said. ``The only way to do this is by holding a properly conducted referendum,'' on self-determination, the group said in a statement received here. It said that any referendum must be conducted by an independentauthority, under UN supervision, and not by the Indonesian government.The statement was issued after the foreign ministers of Indonesia and Portugal concluded talks under the auspices of the UN Secretary General in New York on Thursday, with an agreement to discuss Jakarta's offer of autonomy.

But the ETISC made it clear that it saw autonomy as merely a transitional stage leading to a referendum on self-determination. ``ETISC support the idea of a transitional autonomy, but only until such time as a referendum can be organised,'' the group said.

In a statement issued after the talks, Portuguese Foreign Minister Jaime Gama and his Indonesian counterpart Ali Alatas said they had agreed to autonomy talks in the hope of reaching agreement by the year-end on the former Portuguese colony invaded by Indonesia in 1975. They also agreed on a series of other steps to speed up a solution, including closer involvement of East Timorese and the opening of interests sections, the lowest form of diplomatic recognition,in their respective capitals.

The negotiation of the transitional autonomy required the full involvement of the people of East Timor and jailed rebel leader Xanana Gusmao must be released to take part in negotiations regarding the territory, the ETISC said. Gusmao, who is currently serving a 20-year jail term for plotting against the Indonesian state and possession of illegal weapons, is the person ``whom most East Timorese regard as their leader,'' ETISC added.Lisbon and Jakarta cut diplomatic ties when Indonesia unilaterally declared East Timor its 27th province in 1976, a year after the invasion in a move never recognised by the United Nations and most states.