If, as most expect, none of the competing 14 parties wins a majority, negotiations will be needed to form a coalition government.
Earlier this year two rounds of presidential elections installed Jose Ramos Horta, the former independence campaigner and Nobel Peace Prize winner, as the country’s second president, succeeding Gusmao.
No single party expected to win majority under proportional representation system
Vote seen as showdown between new CNRT party and Fretilin
Key issues: Alleviating poverty, managing oil revenue, law and order
The presidential post is largely ceremonial, while much of the real power lies with the post of prime minister.
Indonesia broke free from Indonesian rule in 1999 but descended into bloody turmoil and political chaos a year ago following a military mutiny.
With just under 20 per cent of the ballots counted as of Monday morning, Alkatiri’s Fretilin had 33 per cent of the votes counted so far.
That put it almost 10,000 votes up on Gusmao’s National Congress for the Reconstruction of East Timor, or CNRT, which had 23 per cent of the vote.
However, that figure is based on a tally of just 100,000 out of more than 500,000 ballots cast.
Complete results are not expected until later this week
The election was closely watched by international observers, with a European Union team of monitors praising the vote as free and fair.
“Timorese people have chosen for the first time their parliament members from a plural range of party options,” said delegation chief Ana Gomes.
“This represents a great step forward in the consolidation of a democratic culture and toward a peaceful end of the deep crisis in which the country was plunged in recent times.”
In April and May last year, East Timor descended into chaos when fighting between police and army forces led to gang warfare, looting and arson, killing 37 people and driving 155,000 from their homes.
About 3,000 foreign peacekeepers helped to restore relative calm, but the nation is still plagued by endemic unemployment and poverty.
“The people’s misery has continued during our five years of independence as a result of our political leaders’ confrontations,” said Bishop Alberto Ricardo da Silva, in his Sunday Mass in the capital, Dili.
“There is no progress. There are no job opportunities for the young people, and that was the cause of the crisis last year.”