DILI (AFP) -- Asia's newest and most impoverished nation East Timor faces a tough task ahead lifting itself out of widespread poverty despite making social and political gains, a UN report warned.

The "Path Out of Poverty" report painted a bleak picture of conditions in the nation of one million people, where the economy has been shrinking and development indicators only slightly improving.

With per capita income at just 370 dollars per year, the fledgling nation is the poorest country in the region and its economy has eroded further as UN personnel and aid workers have left over the past two years, it said.

East Timor, which has rich unexploited oil and gas reserves, gained full independence in May 2002 after more than two years of UN stewardship and 23 years of Indonesian rule. Peacekeeping missions remained here until last May.

But the former Portuguese colony voted to break away from Indonesia in a UN-sponsored ballot in 1999, infuriating the Indonesian military and militias who murdered at least 1,400 East Timorese and destroyed almost 70 percent of all buildings here before leaving, according to the UN.

Life expectancy in 2004 was 55.5 years compared to a 70.5 percent average for East Asia Pacific nations, half the population has no access to safe drinking water, and 90 children out of 1,000 die before they turn one, it said. Education standards are also poor, with a 2004 adult literacy rate of 50.1 percent, compared to an East Asia Pacific average of 90.4 percent, while up to 30 percent of primary school-age children are not at school.

Data on income poverty has not been updated since 2001, when some 40 percent of people were estimated as living below the poverty line, set at 55 US cents per day in East Timor, the report said.

Sustained economic growth was crucial for development, it noted. Growth would have to start with agriculture, which employs around three-quarters of East Timor's labor force but contributes only one-fifth of gross domestic product, it said. Annual investment to achieve annual economic growth of five to seven percent would need to be 48 million dollars, it estimated, in order to meet a goal of reducing poverty by one third by 2015.

Taking into account required expenditure in the health, education and water and sanitation sectors needed for East Timor to meet all the UN's Millennium Development Goals, up to 203 million dollars may be needed each year.