The unfurling of East Timor's flag and the lighting of fireworks Sunday midnight marked the formal coming out of the newest country of the millennium, one whose test of nationhood will be underway for many years to come.

For now, however, the 800,000 people of this country, whose official name is the Democratic Republic of Timor Leste — are simply savouring the moment few imagined even just a few years ago.

After nearly 400 years of Portuguese rule, a quarter century of Indonesian occupation, during which up to a third of its original population died from war-related causes, and two and half years of UN supervision, East Timor is standing on its feet as an independent nation.

Guests from 84 nations, including UN Secretary General Kofi Annan, Indonesian President Megawati Sukarnopturi, Portuguese President Dr Jorge Sampaio, and former US President Bill Clinton, were on hand to mark the celebrations.

In his address to revellers and the nation, president-elect Xanana Gusmao praised the Timorese' determination and thanked the international community for their assistance in helping the country reach its long-sought goal of independence.

In a move aimed at reconciliation with its largest neighbour, Gusmao paid special tribute to Megawati, whom he earlier accompanied to the Heroes Cemetery, where Indonesian soldiers who died during their 24-year war to subjugate Timorese nationalist guerrillas are buried.

The former guerrilla leader, who fought Indonesian troops from Timor's forests, and spent seven years in a Jakarta prison, called previous Indonesian-Timorese ties ''a historical mistake which now belong to history and to the past''.

Enormous challenges

Yet aside from the celebrations attended by 150,000 people, a candle-lit memorial to those who died in the independence struggle, and a march by former Falintil fighters, Gusmao acknowledged that East Timor faces enormous challenges, including alleviating poverty, providing jobs, health care and education.

All these will need to be addressed in rebuilding the country after the devastating violence that decimated it in 1999, after nearly 80 percent of its people voted to break away from Indonesian rule.

''Our independence will have no value if all the people in Timor Lorosa'e continue to live in poverty and continue to suffer all kinds of difficulties,'' he said. ''We gained our independence to improve our lives. Because of this, we are celebrating our independence.''

Nearly three years ago, pro-Jakarta militias razed the country, killing 2,000, displacing three-quarters of the population, and destroying nearly all buildings in the aftermath of the UN-sponsored referendum.

As the poorest country in Asia today, and the world's sixth poorest, economists with the United Nations Development Programme (UNDP) estimate that half of East Timor's population earns about a dollar a day, surviving mostly as subsistence farmers.

For the moment, the threat of renewed militia violence, or retribution directed at former militia members who have begun returning to East Timor, is marginal.

A much greater cause for concern is widespread unemployment — which some estimate at up to 80 percent — and simmering discontent among the Timorese with the new government, because of the disparities that exist between the elite and the governed.

Little benefit

The tradition of inequalities is among the unfortunate handovers from the UN interim administration, one that came at a price tag of 2 billion US dollars and afforded little economic benefit to the Timorese themselves.

Dili is now one of the most expensive cities in Asia, and local residents cannot afford to eat at most restaurants, which cater to international UN staffers who are paid 200 times more than their local counterparts.

Meanwhile, Dili's population has soared to 100,000 since 1999, and unemployed youth hawk oranges, mobile telephone cards and pirated CDs to make ends meet.

Homeless children sleep on the pavement outside Dili's Hello Mister Supermarket, where goods and produce imported from Australia are priced on par with Harrods in London.

But the bubble will not last long. Once the economy begins to deflate when UN staffers begin leaving East Timor this week, it is not yet clear what the effect will be.

Jobs for locals will be increasingly scarce, and until revenues from oil exploration in the Timor Gap begin feeding the economy, East Timor will largely depend on foreign aid. On May 15, the international donor community pledged more than 360 million dollars, to be spread over three years, in development aid to East Timor. This is in addition to 81 million dollars already available through a multi-donor trust fund.

To make matters worse, after the Timorese transitional government adopted Portuguese as the country's official language, young people who grew up under the Indonesian education system, who never learned their distant colonials' tongue, quickly became known as 'the lost generation'and will be at increasing odds to find work.

The people's needs in the districts are equally urgent. In Same, the capital of Manufahi district five hours from Dili, Columbian Doctor Xavier Pineda, is one of two doctors servicing 35,000 Timorese.

He complains that people are dying unnecessarily from tuberculosis, malaria, diarrhoea, respiratory infections and other treatable illnesses because of a lack of directive from the new administration.

No equipment

At his clinic, Dr. Pineda says he does not have the basic equipment he needs to perform routine medical tests, let alone the necessary equipment for delivering babies. ''I've seen four children die because I don't have forceps to pull them out,'' he says. ''You can feel the child and you know the child is going to die. Can you imagine this level of disorganisation at all levels? It's very worrying.''

Outside Dili, few places have electricity for more than a few hours per day, and often not even everyday. Telephone connections outside the capital do not exist, and local media, funded by the United Nations and international agencies — is largely unsustainable.

But how to rebuild a society that has been deliberately and systematically broken during 24 years of brutal military occupation?

According to Kristina Tang of the Psycho-Social Recovery and Development in East Timor, an NGO that provides assistance and counselling to people suffering from trauma, 15 to 25 percent of the population suffers from post-traumatic stress disorder.

''Now that the situation has started to stabilise, the effects of trauma are starting to come to the surface,'' says Tang. ''Unemployment is high and a lot of men are drinking. They're thinking about their trauma and are manifesting the consequences of that. This is when people start showing problems as a result of all the violence.''

One of the spin-offs of years of conflict, says Tang, is an increasing level of domestic violence and child abuse, that now accounts for one in five serious crimes before East Timor's courts.