East Timor's prime minister announced his resignation Monday, setting off celebrations in the violence-scarred capital and raising hopes for an end to the political crisis gripping the nation.

Prime Minister Mari Alkatiri, who is battling allegations that he formed a hit squad to silence opponents, has faced mounting calls to step down, including from the country's popular president.

"I declare I am ready to resign from my position as prime minister," Alkatiri told reporters who gathered at his home in Dili.

Many say Alkatiri's dismissal of 600 disgruntled soldiers in March was to blame for street battles and gang warfare that left at least 30 people dead and forced nearly 150,000 others to flee their homes.

It was the worst violence since the nation voted for independence from Indonesia seven years ago.

Alkatiri read a statement saying he wanted to share responsibility for the "crisis affecting our country" and to avoid the resignation of President Xanana Gusmao, who had threatened to step down if the prime minister did not.

Gusmao, who led East Timor's armed resistance against 24 years of Indonesian role, enjoys nearly unanimous support in a country of 800,000 that is divided along political and sometimes ethnic lines.

He said Alkatiri no longer had the trust of the people, who have poured into the streets in recent days to express their displeasure.

As news of Alkatiri's decision spread, thousands drove through the main streets of Dili, banging drums and cans. At the waterfront site where they have rallied for nearly a week, young men danced in the street.

Foreign Minister Jose Ramos-Horta, who has offered to lead an interim government until elections next year, told reporters Monday that Alkatiri's letter of resignation was on its way to Gusmao.

The ruling Fretilin party, which will select his replacement, was considering four candidates, including independent Health Minister Rui Maria Araujo, said senior party member Agriculture Minister Estanislau da Silva, who also is among the nominees.

The others were the ministers of labor and state, also of Fretilin, he said.

The party over the weekend said it did not want Alkatiri to step down, prompting the resignation of Ramos-Horta, who won the Nobel Peace Prize in 1996 for his nonviolent resistance to Indonesian rule, as well as the transport minister.

Those announcements — along with Gusmao's own threat — raised fears that the government was about to collapse which could lead to further turmoil on the streets.

Violence in Dili, including gunbattles between rival security factions and clashes between machete-wielding youths, eased last month with the arrival of a 2,700-member Australian-led peacekeeping force.

Hundreds of houses were burned to the ground and government warehouses were looted.

Australia welcomed Alkatiri's resignation, with Prime Minister John Howard saying it could herald the end of the political crisis.

It is "evidence we are moving to the resolution of the issue," Howard told reporters during a visit to the Indonesian island of Batam.

Analysts agreed.

"This could be the circuit-breaker everyone was waiting for," said Damien Kingsbury, an Australian academic and expert on East Timor.

"It will also allow Fretilin to elect a leader that is more inclusive and not as authoritarian in their tendencies."

Though Alkatiri said he knew nothing about the alleged hit squads, a close ally, the former Interior Minister Rogerio Lobato, is facing charges for allegedly arming civilian militias at his request.

Alkatiri's departure will raise hopes for the nearly 150,000 people who remain in tent camps in and around Dili, a normally sleepy seaside city dotted with whitewashed churches, a legacy of four centuries of Portuguese colonial rule.