By Rob Taylor

CANBERRA, Feb 20 (Reuters) - Australia's top military commander on Wednesday urged rebel East Timorese soldiers to surrender as Australian commandos continue hunting them following an attack last week on the country's leadership.

Air Chief Marshal Angus Houston said elite Australian special forces soldiers hoped to arrest followers of rebel leader Alfredo Reinado, killed during a pre-dawn gunbattle in which President Jose Ramos-Horta was seriously wounded.

"We would like to bring these people to justice peacefully without confrontation, and I encourage any of Reinado's former followers to surrender to the authorities in East Timor," Houston told a hearing before Australia's upper house Senate.

But under rules of combat covering the near-1,000 Australian soldiers helping East Timorese police and soldiers, Houston said Australian-led international forces would shoot back if "any individuals choose confrontation".

East Timor's police and military have been merged following the attack on Ramos-Horta and Prime Minister Xanana Gusmao to better coordinate the hunt for rebels.

Nobel laureate Ramos-Horta, 58, is recovering in hospital in Australia after being shot twice in the back and chest, undergoing more surgery at the weekend. Gusmao escaped injury.

Reinado deserted the army in May 2006 to join about 600 former soldiers sacked earlier that year amid claims they were discriminated against because they were from the western part of East Timor.

International peacekeeping forces were sent to the resource-rich but largely impoverished country to halt ethnic fighting and clashes between rival police and the military which broke out following the rebellion.

Houston said the security environment in East Timor following the arrival of 200 Australian fast-reaction reinforcements was now stable but tense.

But after criticism from Dili that Australian peacekeepers and the 1,600-strong United Nations police in the country failed to provide warning of last week's attack, Houston said his troops were asked last June by Ramos-Horta not to arrest Reinado.

"On Oct.12, and significantly, President Horta granted Reinado freedom of movement, and that freedom of movement was carrying arms," Houston said.

That was despite the fact the rebels posed a threat with high-powered automatic rifles, he said.

Houston also responded to criticism that Australian forces failed to provide a helicopter to assist Gusmao after his vehicle convoy came under attack, saying initial requests from East Timorese guards had been too vague to assess the threat.

East Timor gained full independence from Indonesia in 2002 after a U.N.-sponsored vote in 1999 marred by violence. Indonesia invaded the former Portuguese colony in 1975. Many thousands of East Timorese died during the brutal occupation that followed. (Editing by Jerry Norton)

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