Thousands of protesters have blockaded Australia's embassy in Dili calling for a new border in the oil-rich Timor Sea.
A treaty signed by Australia and East Timor in 2006 outlined the allotment of billions of dollar in revenue from oil and gas fields in the sea between the neighbours.
Dili says Canberra was spying during these negotiations giving Australia an unfair commercial advantage.
It wants the treaty torn up and a new maritime border negotiated.
Claims were made before a tribunal in The Hague that the Australian Secret Intelligence Service (Asis) used listening devices, planted in East Timor's cabinet office under the guise of refurbishment, to obtain information about a Timor Sea gas treaty in 2004.
Undersea oil challenge
- There is no permanent maritime boundary established between Australia and East Timor.
- Australia and East Timor have entered into three provisional revenue-sharing treaties regarding oil and gas in the Timor Sea.
- East Timor receives 90% of petroleum revenue from the Joint Petroleum Development Area that the countries share.
- But East Timor believes Australia is getting far more than it is entitled to under the United National Convention on the Law of the Sea (UNCLOS).
- The small nation wants to establish a maritime boundary with Australia that is equidistant between the two nations.
- The Australian government says that the current arrangements are consistent with UNCLOS, and claims an equidistant maritime border will actually reduce East Timor's revenue.
More than 10,000 activists gathered in Dili on Tuesday with schools across the capital closed for the day, organisers say.
"This is possibly the biggest demonstration we've seen since we declared independence," protest coordinator Juvinal Dias told the AFP news agency.
Timorese supporters in Australia, Indonesia, Malaysia and the Philippines are expected to stage protests in solidarity.