DILI, Aug 23 (Reuters) - A market and 10 houses were torched in East Timor during fighting between gangs armed with machetes and steel darts, while two people were reported killed in another confrontation, the United Nations said on Thursday.

Violence has erupted in several districts in East Timor since early this month when President Jose Ramos-Horta appointed a coalition led by independence hero Xanana Gusmao to govern after no party won a majority in parliamentary elections on June 30.

It was unclear if the latest violence was linked to political tensions.

Three people were arrested after the fighting in Metinaro east of the capital Dili, during which a market was badly damaged by fire, the U.N. police said in a statement.

In Ermera southwest of the capital there were reports of a confrontation in which two people were killed, the U.N. said, adding there was no further information.

Separately, police commander Mateus Fernandes told Reuters 26 houses had been burned down during the gang fight in Metinaro in a camp for displaced people.

Two more arrests were made in the Bairopite in the Dili area after groups blocked a road with burning tires and attacked a police car, injuring one officer, Fernandes said.

Ramos-Horta's decision to appoint Gusmao's coalition sparked violent protests by supporters of the former ruling party, Fretilin, which claims the right to govern after winning most votes in the polls.

Factional bloodshed broke out in the impoverished country of about 1 million people last year, forcing tens of thousands to flee their homes.

The mayhem, during which 37 people were killed, was triggered by the previous government's decision to sack 600 soldiers.

About 3,000 international police and troops are currently in East Timor to restore order.

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