Students protested in the East Timor capital Dili on Wednesday, the third day of demonstrations against government spending priorities, radio reports said.

Dozens have been arrested outside the National University where hundreds of students have faced off against local police and United Nations police.

Australia's ABC Radio reported from Dili that the protestors carried placards calling on the government of Prime Minister Xanana Gusmao to subsidize food prices rather than buy a fleet of four-wheel-drive vehicles for the 65 Parliamentarians.

East Timor, which became independent in 2002, is South-East Asia's poorest country and has an unemployment rate of 50 per cent.

An Indonesian province for the 24 years up until 1999, the tiny half-island of 1 million people has lurched from one political crisis to another since independence.

The students claim that all 65 parliamentarians are to get new vehicles but Gusmao's government said only 26 vehicles were on order for the lawmakers.

The latest threat to the overwhelmingly Catholic nation's survival came in February when President Jose Ramos Horta was shot by renegade soldiers, who launched twin assassination attempts against the Nobel laureate and against Gusmao.

Gusmao escaped uninjured from the attack that nearly cost Ramos Horta his life.