East Timor's ruling party refused to fire the prime minister Sunday, defying the demands of the popular president and triggering the resignation of the Nobel prize-winning Foreign Minister Jose Ramos-Horta.

The developments threatened to completely unravel the government as it struggled to regain control following the worst outbreak of violence since the country voted for independence seven years ago.

Many East Timorese say Prime Minister Mari Alkatiri's decision to dismiss 600 disgruntled soldiers in March was to blame for street battles and gang warfare that left at least 30 people dead and sent nearly 150,000 people fleeing from their homes.

He also faces allegations of forming a hit squad to silence his political opponents, a charge he denies.

President Xanana Gusmao, revered for leading East Timor's resistance to Indonesia's 24-year occupation, last week said he would resign himself unless Alkatiri stepped down — sending thousands to the streets calling for the prime minister's ouster.

But the ruling Fretilin party said after holding emergency talks Sunday that Alkatiri had accepted the unanimous appeal of its committee to remain in power.

Gusmao's office would not say what his next move would be.

But Ramos-Horta, who won a Nobel peace prize in 1996 for his nonviolent resistance to Indonesian rule over his tiny homeland, responded by saying he himself would resign "until a new government is established."

He begged Alkatiri to follow suit, saying otherwise "the situation could become worse."

"I do respect Mari Alkatiri ... and we were friends for many years, but in this case I ask my old friend to resign," Ramos-Horta said in a live interview on East Timor Radio and Television late Sunday. Transport Minister Ovideo Amaral also handed in his resignation, lashing out at Fretilin for ignoring the will of the people.

But members of the ruling party said — that while they didn't want to escalate the crisis engulfing their nation — forcing a prime minister from office was not the answer.

"When (former U.S. President Bill) Clinton was accused, did he resign?" asked senior Fretilin member and Agriculture Minister Estanislau da Silva.

Just before dusk, some 5,000 anti-Alkatiri protesters rallied outside Government House after staying off the streets most of the day. The mood was festive, but it appeared most did not know of Fretilin's decision to keep Alkatiri in power.

A group of young men in black T-shirts circled a wooden casket that bore a photo of Alkatiri and a sign reading, "Vampire Man."

"We want a new prime minister, a clean one, a wise one, respected by the people, not an arrogant man," said 27-year-old Eugenio Gusmao.

Though Alkatiri said he knew nothing about the alleged political hit squads, a close ally, the former interior minister, is facing criminal charges for allegedly arming civilian militias on his request.

Australian media reported Sunday that East Timor's police chief Paulo Martins said he informed the prime minister by letter that he had seen civilians armed with 17 government assault rifles.

Martins also told the Australian Associated Press about a May 21 meeting of key ministers and security personnel where Ramos-Horta raised the police chief's gun claims, getting no response from Alkatiri.

"He just kept silent," said the police chief, who could not be reached for comment. "I find it very strange that he now says he knew nothing.

Violence has eased in recent weeks with the arrival of a 2,700-strong foreign peacekeeping mission.

But close to 100 people, including wailing widows, a U.N. special representative and Australian military officials, turned out Sunday for a memorial service to remember 10 police officers who were gunned down by soldiers in one of the bloodiest battles.

Families lit candles near the police headquarters where the May 25 shootout occurred, some laying wreaths.