(Recasts with Ramos-Horta, analyst)

By Jahabar Sadiq and Ed Davies

DILI, June 29 (Reuters) - East Timor's leaders need to join together to focus on fighting poverty and improving security after parliamentary elections in the tiny nation, President Jose Ramos-Horta said on Friday.

The young country faces huge problems with tens of thousands of people still taking refuge in squalid camps after fleeing their homes more than a year ago amid deadly communal violence.

Speaking on the eve of the polls, Ramos-Horta, 57, said he was confident that he could work with a new government to help heal deep divisions in the country five years after independence.

"So in five years, I believe we can have improved the lives of tens of thousands of people, and at the same time the country remains peaceful," he told Reuters in an interview in his modest office in the capital, a large map of Indonesian on the wall.

There are 14 parties or coalitions contesting the poll, but it is widely seen as a showdown between the ruling Fretilin party and CNRT, a party launched by charismatic resistance hero, Xanana Gusmao, who after serving as president now wants the more hands-on post of prime minister.

Ramos-Horta said the country should use the interest earned from a $1.2 billion oil fund, together with international aid and, possibly, bilateral borrowing to create jobs and slash poverty -- "if necessary with direct cash transfers into the pockets of the poor people".

Peaceful elections this week should help tens of thousands of displaced people living in camps since the 2006 violence to return home, added Ramos-Horta, who won a Nobel Peace Prize for his decades-long campaign from exile for a peaceful end to Indonesian occupation..

COALITION GOVERNMENT?

Analysts say that none of the parties contesting the vote seem to have a clear vision for the displaced.

"This is not normal as human beings, living here for one-and-a-half years," said Leopoldo Pinto, speaking in his make-shift shelter in a dusty square in the heart of the capital.

The 50-year-old father of seven, dressed in a grey T-shirt and yellow sandals, said he arrived in the camp on May 4 last year after his home on the outskirts of Dili was burnt to the ground because he originated from the east of the country. "The leaders just want to change their posts but do not want to change things for us," he added, drawing on a clove cigarette.

About 150,000 people were driven from their homes last year during violence that erupted after the army tore apart on regional lines.

The trouble spilled over into widespread communal violence, only stemmed when foreign troops were brought in.

Ramos-Horta paid tribute to the 1,700 U.N. police and also large contingents of Australian and New Zealand troops helping keep the peace, and spoke out against any thought that they should leave the country near term.

Julio Tomas Pinto of the University of Timor Leste said he did not expect either Fretilin or CNRT to win a clear majority in the 65-seat parliament.

"I predict both will get about 20 seats in parliament but to form the government in parliament they each need 35 or 34 seats in parliament so they will have to form a coalition with other parties," he told Reuters Television.

(Additional reporting by Tito Belo and Reuters Television)

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