The violence prompted thousands of residents to flee or hide, terrified, in their homes.
The UN said it would relocate all UN families and nonessential staff to a temporary safe haven in Darwin, Australia.
Mari Alkatiri, the East Timor prime minister, described the violence "an attempt to stage a coup d'etat," as fires raged across the city.
The Australian troops, who answered an emergency call from the fledgling country's government two days ago, patrolled the city in armoured personnel carriers and tanks and disarming machete-wielding gang members.
Mobs rampaged regardless, and the rattle of automatic weapons fire continued throughout the city as darkness fell on Saturday, with some residents saying homes were still being burned.
At least seven people were wounded, mostly during street clashes. Despite threats to use force, foreign soldiers were not believed to have fired their guns.
The chaos and violence has left
ordinary people traumatised
Dozens of houses and cars were set ablaze in one early morning raid. Women and children fled screaming to seek shelter at a nearby church.
Soon after, Australian soldiers rounded up dozens of civilians armed with machetes, spears and other weapons, questioning them and searching vehicles.
Thousands of other terrified residents loaded provisions onto trucks and cars and drove to embassies, the airport or makeshift shelters.
Several ambulances were seen racing through the streets, sirens blaring.
The violence was triggered by the March firing of 600 disgruntled soldiers - nearly half the 1,400-member army - and is the most serious crisis East Timor has faced since it broke from Indonesian rule in 1999.
After staging deadly riots last month, the sacked troops fled the seaside capital, setting up positions in the surrounding hills, and threatened guerrilla war if they were not reinstated.
They started ambushing soldiers in the capital on Tuesday, sparking days of pitched gunbattles with the military that so far have killed 23 people and injured scores.
Australian troops are patrolling
the violence-torn capital Dili
A UN official stressed that a relocation of personnel and their families to Darwin, Australia is a temporary measure.
"As head of the mission, I am responsible for the safety of all personnel and therefore after careful deliberations, I think a temporary relocation for nonessential staff is the most judicious choice at this time," said Sukehiro Hasegawa, special representative of the UN secretary-general.
The world body will still keep more than 100 international staff in Timor-Leste while others work from Australia, Hasegawa said.
On Saturday morning, young men armed with slingshots and rocks targeted what they believed were the homes of soldiers who sympathised with Indonesian army militias responsible for deadly violence that accompanied Indonesia's withdrawal.
A mob torched the house of a government minister, killing five children and an adult whose charred bodies were found on Friday.
Ten unarmed police also were gunned down by soldiers as they left their headquarters in downtown Dili under UN escort on Thursday.
The more than 1,000 Australian troops arrived after East Timor's government said it could not control the situation. New Zealand, Malaysia and Portugal also agreed to help, and some advance forces already were on the ground.
Australia said on Sunday it will send up to 50 federal police officers within 24 hours to help contain the marauding gangs in Dili.
Brendan Nelson, the Australian defence minister, said that the police reinforcements will join 15 officers already in the capital.