DILI, Dec 20 (Reuters) - East Timor's parliament has approved a state budget of nearly $350 million for 2008 that aims to improve security and tackle poverty in Asia's youngest nation.

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 and ended only after foreign troops were brought in to restore order.

"Next year the government that I lead will consolidate national security and stability, we also will create a productive system to enable sustainable development and resolve the main problems of the nation, especially poverty and unemployment," Prime Minister Xanana Gusmao told parliament late on Wednesday.

Gusmao, a resistance fighter turned politician, has said his administration will use some of the more than $1 billion from an oil and gas fund to tackle poverty.

Estanislao Aleixo da Silva, a representative of the opposition Fretilin party and a former interim prime minister, said the budget did not amount to a national development plan.

"The Gusmao government is not investing much on infrastructure, education and health," he said. Gusmao told parliament that the government was willing to give rebel soldiers a last chance to hold talks.

Alfredo Reinado, a former military police chief, has led a revolt against the government and has been charged with murder during last year's wave of factional violence.

The new government had ordered security forces to stop hunting Reinado and instead proposed dialogue to discuss his grievances and those of other sacked soldiers.

Reinado has said he was fighting for justice for the sacked soldiers, adding he was ready to hold talks with the government. (Reporting by Tito Belo; Writing by Ed Davies; Editing by David Fox)

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