The cash-strapped government dismissed more than 500 soldiers earlier this month, prompting a series of protests joined by groups the government says have broader motives.
Friday's demonstration turned violent, as protesters burned cars and threw rocks at police and officers fired into the crowd.
Police originally said two people died in the clashes, but on Saturday said two more bodies had been found, adding that all the dead were protesters.
The riot and sounds of gunfire in Dili overnight prompted the people to flee their homes.
More than 1,000 were camped out in the grounds of a Catholic cathedral and about 300 on a field at the US embassy.
Residents have taken shelter in a
church and the US embassy
Xanana Gusmao, the president, told the refugees: "The situation is under control now. I ask people to return home."
Friday's protest had been planned as the last in a series by the sacked soldiers. They say their dismissal was unfair and have demanded a quick government investigation.
A one-time Portuguese colony, East Timor was invaded by Indonesia in 1975 and formally annexed the following year.
No Australian troops
After decades of simmering rebellion against Indonesian forces, the people voted overwhelmingly for independence in a 1999 referendum marked by bloodshed in which an estimated 1,000 people were killed.
Most of the violence was blamed on pro-Jakarta militia backed by elements of the Indonesian military.
Australian troops with a UN mandate were critical to bringing peace to the territory in 1999, which is north of Australia and 2,100km east of Jakarta.
"There is no plan for Australia to become any more involved and the East Timorese haven't asked us to become involved"
Australian foreign minister
After an interim period of UN administration, it became independent in 2002.
Alexander Downer, the Australian foreign minister, on Saturday ruled out further Australian involvement.
"There is no plan for Australia to become any more involved and the East Timorese haven't asked us to become involved," he said. "They feel confident they can handle the situation on their own."
One of the world's poorest countries, East Timor has considerable energy resources but is only now starting to develop them.