Al Jazeera correspondent Hamish MacDonald, who is in East Timor, said Reinado was holed up in the town of Same in East Timor's central highlands and had vowed to resist any attempts to arrest him.
"They won't take me alive", Reinado told Al Jazeera.
Reinado has denied attacking the police post saying the police gave him the weapons.
Reinado deserted East Timor's armed forces last May along with nearly 600 soldiers, triggering violence between rival factions of the security forces that led to the downfall of the government in June.
Looting, arson and fire fights lefts 37 dead and forced 155,000 from their homes in the worst violence in East Timor since its bloody break from Indonesia in 1999.
Reinado was jailed for leading the mutiny but escaped from prison in September along with 50 other inmates.
He surrendered weapons to Australian peacekeepers several months ago, vowing to work with the country's leaders for a peaceful solution to East Timor's continued troubles.
He had been involved in negotiations with the government since last year, including meetings with the country's military chief, but until now no attempt has been made to arrest him.
|Australia has about 800 peacekeepers |
deployed since last year's violence [EPA]
Last week, in an interview with Al Jazeera, Jose Ramos Horta, East Timor's prime minister, said negotiations with Reinado had been going well and he saw no reason to change tactics.
Our correspondent says in the wake of Sunday's alleged raid, all that now seems to have changed.
In the run-up to elections both the government and the security forces are keen to show they have control of the country and reverse the growing perception that East Timor is descending into lawlessness, he says.
Australia has deployed some 800 troops to keep peace in East Timor following last year's violence and the disintegration of the country's police force.
Speaking to reporters Brigadier Malcom Rerden, the Australian commander of the International Security Force called on Reinado to surrender, saying the situation had become very serious.
"I am not going to speculate on what action the ISF may take, or when," he said.
East Timor is due to hold presidential elections in April, shortly before the fifth anniversary of its independence from Indonesia.
Australia has warned of increased violence ahead of the poll after clashes between its peacekeepers and East Timorese refugees left two civilians dead last week.
Meanwhile Phil Goff, New Zealand's defence minister, has said his country will consider sending more troops to East Timor if necessary, to bolster its currently deployment of about 150 troops.
"Clearly there is a level of violence between different regional groups and gangs within the community that do cause some concern," Goff told reporters on Tuesday.