Hundreds of former soldiers burned cars and shops in East Timor's capital Friday, sparking violent clashes with police that left at least two people dead and 27 injured, a hospital official and witnesses said.

The soldiers, who were dismissed last month for striking against "discriminatory" working conditions, have held near-daily rallies in Dili this week demanding that their grievances be heard.

But Friday's was the largest and the most violent.

Police fired tear gas at the demonstrators after they set nine cars on fire near the offices of Prime Minister Mari Alkatiri — hours after he promised to investigate the soldiers' complaints. Shots also could be heard near a local market.

CountryWatch: East Timor

Antonio Caleres, director of the state-owned Guido Valadares hospital, said two civilians were killed in the clashes, both with gunshot wounds, and 27 others were admitted with injures, including several police.

One officer — identified as the deputy chief of the rapid reaction unit — was in critical condition with what appeared to be stab wounds, Caleres said.

Nearly 600 soldiers — a third of East Timor's armed forces — were dismissed in March after a monthlong strike to protest what they said was discrimination in the work force.

Many of them fought against Indonesian rule of East Timor, the world's newest nation, and said they were routinely passed up for promotions or given the worst assignments.

Following a closed-door meeting with President Xanana Gusmao on Friday, Alkatiri said the government had agreed to set up a panel to find ways to resolve the problem. He said the committee would be made up of government officials, religious leaders and intellectuals.

Indonesia invaded East Timor in 1975 and ruled the tiny half-island territory with an iron fist until 1999, when a U.N.-organized plebiscite resulted in an overwhelming vote for independence.

In a final act of vengeance, withdrawing Indonesian troops and their militia auxiliaries destroyed much of the country's infrastructure and killed at least 1,500 people.