Gusmao's party has formed an alliance with smaller groups to achieve the majority needed to rule the impoverished half-island nation, which gained independence from Indonesia in 2002.

The alliance, if approved, would open a new chapter in the young nation's turbulent history and leave the former ruling party, Fretilin, in opposition, even though it won the largest share of the vote in the poll.

Gusmao's National Congress of East Timor's Reconstruction (CNRT) will ally with the Association of Timorese Democrats-Social Democrat Party and the Democrat Party, the groups said.

Taken together they won 51 percent of votes. The CNRT, formed earlier this year, won 24 percent of the vote.

"We hope this alliance is able to guarantee a strong and lasting majority," the parties said in a statement read to a press briefing.

"This coalition, which will constitute a majority in parliament, has accepted the call for governance," they said. "The details of the agreement will be decided later and presented to you."

But Fretilin said it had not agreed to sit in opposition, signalling a possible legal battle ahead.

The party, which has dominated East Timor's political landscape since its election in 2001, won 29 percent of the votes cast in the poll contested by 14 parties.

But that was well short of the absolute majority required to form a government in the 65-seat parliament.

"We don't rule out the possibility of forming our own government or the possibility of forming a government with other parties," a senior Fretilin advisor, Harold Moucho, told AFP.

"There is still time for negotiations... You need to get all the parties together. One cannot put aside the party which won the majority of votes," he said.

East Timor's Court of Appeal must confirm the election results and then the coalition must seek approval from President Jose Ramos-Horta to form a government.

Sophia Cason from the thinktank International Crisis Group told AFP the constitution was ambiguous on what should happen next and she believed the president would get legal advice.

"I think President Ramos-Horta will ask Fretilin to form a government and CNRT will obviously object to that. He will then give Fretilin a week and then will ask CNRT to form a government," she said.

She warned that no matter who takes power, they may have difficulty passing a budget if MPs cross the floor -- which could force an early next election.

The new government will face a formidable job, as the tiny nation has suffered massive economic and social dislocation.

Atul Khare, the head of the UN mission in East Timor, said in a statement that the interpretation of the constitution was up to the East Timorese.

It was important "to move forward in a way that was legally correct and contributed to the continuing political stabilisation" of the nation, he added.

The parliamentary election followed ongoing violence and political tension since bloodshed on the streets of the capital, Dili, in April and May last year.

That unrest left at least 37 dead and forced some 150,000 people into camps, with most of those displaced still stuck in them.

International peacekeepers and 1,700 UN police were deployed to restore calm. They remain on high alert for post-poll parades and protests.

Fretilin's shrunken showing in the poll was seen as punishment for its failure to prevent last year's unrest or lift the country out of grinding poverty.

Although rich in offshore oil and gas deposits, unemployment is running at close to 50 percent.

East Timor gained independence in 2002 after a bloody separation from occupying Indonesia three years earlier. It had also been ruled by Portugal for more than four centuries.