The United States lifted an arms embargo against Indonesia, the world's fourth-most populous nation, ending a six-year ban on military contact because of human rights concerns, the US State Department said on Tuesday.
The administration of President George Bush has argued that isolating Indonesia, which has been hit by several bombings in recent years blamed on an regional group linked to al-Qaida, is not in Washington's strategic interests.
Brad Adams, Asia director at Human Rights Watch (HRW), the New York-based group, said: "This is the wrong time to let up the pressure on the Indonesian military.
"Now is the time to insist that it ends abuses against civilians, phases out the territorial structure and ends its corrupt business practices."
The rights group expressed concern over statements by Susilo Bambang Yudhoyono, the Indonesian President, and General Endriartono Sutarto, the army chief, calling for the reinvigoration of the territorial command structure.
HRW said on its website: "The territorial command structure has, in effect, made the army an occupying force instead of focusing on national defence. Public opinion surveys in Indonesia have shown that it is deeply unpopular.
"Efforts to reinforce the territorial command structure serve as an alarming reminder of the failure to implement serious and structural military reform."
The territorial command structure refers to the military having regional commands all the way down to village level, giving it a presence and role in social and political affairs throughout the country.
HRW also voiced concern over the "largely unaddressed issue of the military's continued control of a vast network of legal and illegal businesses" in the country.
Above the law
Indonesian military officers and soldiers who commit human rights violations remain largely beyond the reach of the law.
No senior Indonesian officer has been held accountable for war crimes and crimes against humanity in East Timor - now called Timor Leste - in 1999 or other serious violations elsewhere in the archipelago.
While Jakarta did hold rights trials for some of those accused in the East Timor violence, 16 of the 18 government and military officials involved were acquitted.
"Now is the time to insist that it ends abuses against civilians, phases out the territorial structure and ends its corrupt business practices"
Brad Adams, Asia director, Human Rights Watch
Amnesty International said: "The government's failure to take decisive action to end human rights violations undermined efforts to resolve the conflicts resulting from long-standing demands for independence.
"Impunity was reinforced by the failure of trials of the ad hoc Human Rights Court on East Timor to satisfactorily resolve serious crimes, including crimes against humanity, committed in 1999 in East Timor."
In July, an appeals court overturned all convictions in the first test case of accountability for crimes committed during president Suharto's time in office.
The civilian defence minister still does not have the ability to appoint, discipline or remove officers.
The human rights situation remained grave in Aceh and Papua provinces, with hundreds of reported cases of extrajudicial execution, "disappearance", torture and unlawful arrest, Amnesty said.
US military dealings with Indonesia have been restricted since 1991 when Jakarta's forces launched a bloody crackdown on pro-independence protesters in East Timor.
Sanctions were tightened after a new wave of violence there in 1999. The US had also made it clear that full normalisation of military relations was contingent on the Indonesian authorities' efforts to solve the killing of two American teachers in 2002.
But in January, Washington allowed commercial sales of non-lethal defence items to Indonesia, particularly spare parts for transport planes after a tsunami hit in December 2004.
The State Department used a national security waiver to drop the embargo, State Department spokesman Sean McCormack said in a statement.
Critics say Bush has betrayed
the victims of rights abuses
He said the administration planned to help modernise the Indonesian military and support US and Indonesian security objectives, including counter-terrorism, but that Washington "remained committed to pressing for accountability for past human rights abuses".
Abdul Azis Manaf, a spokesman for the Indonesian Ministry of Defence, said: "We certainly warmly welcome this decision, whatever the reason is."
President Susilo, a US-educated military general elected a year ago in Indonesia's first direct elections for head of state, is popular in Washington because of his crackdown on groups suspected of terrorist links.
Adams, of HRW, said: "Because President Susilo Bambang Yudhoyono was elected democratically, many now wrongly believe that Indonesia's military has been reformed.
"But it continues to be responsible for routine abuses, has failed to address past crimes and remains beyond effective civilian control."