(Transcript from World News Australia Radio)
An oil and gas treaty between the two countries hangs in the balance over the spying allegations, with East Timor vowing to have the agreement cancelled.
(Click on audio tab above to hear full item)
There's been anger in East Timor over reports Australia secretly bugged ministerial deliberations in 2004 during negotiations to share revenue from natural resources in the Timor Sea.
Media reports claim about 100 protesters threw rocks at the Australian Embassy in Dili.
But Juvinal Dias, who was at the rally, says the protests were peaceful.
He says the spying claims indicate Australia doesn't respect democracy and doesn't respect East Timor.
"The main objective of the demonstration is to show that Timore Leste has a right to have sovereignty, to show that Timore Leste has dignity and we have integrity as a nation. We want to show that Australia needs to respect this right. What (the) Australian government did, from our perspective, is disrespectful of the East Timorese people and we feel discriminated (against) by these policies."
East Timor launched a case in The Hague on Thursday to have a $40-billion treaty it signed with Australia torn up.
The protests followed a raid by Australia's domestic spy agency on the Canberra office of a lawyer representing East Timor in the arbitration.
The office of a former intelligence officer associated with the case was also raided.
East Timor has called on Australian authorities to explain those raids, but Prime Minister Tony Abbott says the raids were to protect Australia's national security.
RMIT University's Manager of the Timor Leste Research Program, Damian Grenfell, says East Timor may have been unhappy with the agreement for a long time.
"The East Timorese government probably never felt they got as much from the treaty as they may have hoped for in the first instance. And then to find out after the fact that it wasn't negotiated in good faith is something that, the effect of that on the East Timorese government for historical reasons is something that should never be underestimated."
Activist Juvinal Dias says protesers in Dili were calling for Australia to be fair with its smaller neighbour over the now-disputed deal.
"For us, Australia's very greedy. And we want Australia to have the political will to decide the maritime border between Timor Leste and Australia with a median line based on international principles."
RMIT University's Damian Grenfell says the spying claims could affect Australia's relationship with East Timor in the long-term.
"You can't understimate the effect on political leaderships in countries like East Timor and Indonesia, who have become independent countries after long colonial histories, about how much they prize their sovereignty, and the idea of a foreign country who says that it's doing something in good will but you find out later is recording, listening to and making judgements on the private phone calls of the leaders in those countries is just deemed to be entirely unacceptable."
Australia's Attorney General George Brandis says East Timor should have raised its concerns with Australia before going to The Hague.
But East Timor's amabassador to the United Kingdom, Joaquim da Fonseca says East Timor is not satisfied with Australia's response.
Mr da Fonseca says while the raids won't deter East Timor from challenging the treaty at the Permanent Court of Arbitration when it's expected to meet again in 2014, he doesn't expect it to hurt the relationship with Australia.
"The matter to be settled by this arbitration court should not be used to generalise the relationship that has existed and continues to exist between the two countries and we hope it will build over-arching principle for both of us in proceeding with this arbitration."
