Australia's defence chief said on Monday that the majority of troops would be pulled back next May.
General Peter Cosgrove said only about 50 to 60 of its 400 troops in East Timor would remain after the UN mandate for the peacekeepers expired on 20 May.
The few dozen staying on would help train the defence force for the world's newest country.
The Australian-led multi-national peacekeeping force - now comprised of about 1800 troops - has helped run East Timor since a 1999 vote to break free of Indonesia.
The struggle for independence sparked a bloody backlash in which about 1000 people were killed.
East Timor appeal
Last week East Timor's Foreign Minister Jose Ramos-Horta appealed to the UN to maintain a smaller "robust, credible" presence.
He said a hasty retreat could unravel progress made since the country became independent about 19 months ago.
"We will withdraw all of the peacekeeping force and the Australian component of the peacekeeping force"
General Peter Cosgrove,
Australian defence chief
Ramos-Horta told reporters in the Australian capital Canberra that East Timor wanted the UN to maintain a "rapid action" police force of up to 1000 people to back up East Timor's police, and civilian advisers to support the government.
Australia will withdraw
But Cosgrove said the peacekeeping force would leave.
"My clear understanding of the government position on this is that when the mandate runs out May 20.
"We will withdraw all of the peacekeeping force and the Australian component of the peacekeeping force," Cosgrove told a parliamentary committee.
But Australia plans to commit A$40 million ($30 million) to help its neighbour train police over the next four years.
East Timor is one of the world's poorest nations with a population of about 700,000 and receives $150 million a year in aid from countries led by Australia, Japan and the United States.