Indonesian Foreign Minister Ali Alatas looks on as U.N. Secretary-General Kofi Annan shakes hands with Portuguese Foreign Minister Jaime Gama

UNITED NATIONS (CNN) -- Two days of talks between Indonesia and Portugal ended Wednesday with the two sides agreeing to discuss limited autonomy for the disputed territory of East Timor.

The agreement was considered a breakthrough in the long-stalled negotiations between the two countries. East Timor was a Portuguese colony for 450 years, until December 1975, when Indonesia invaded the country. Indonesia annexed East Timor in 1976, despite Timorese opposition.

The international community has never recognized Indonesia's rule.

The Indonesian and Portuguese foreign ministers said at the conclusion of the U.N.-sponsored talks that they hoped to come to an agreement by the end of the year. They said they would include East Timorese representatives in future discussions.

"We are going to discuss, to negotiate, to negotiate in depth, to discuss in depth what it will all take for this autonomy, taking into account the specific conditions in East Timor," Indonesian Foreign Minister Ali Alatas said.

Both sides backed away from strongly held positions to reach Wednesday's agreement. Indonesia backed away from its demand for international recognition of its sovereignty, and Portugal retreated from its demand for an immediate referendum allowing the East Timor people to decide the territory's fate.

"We moved from extreme positions to the center," Portuguese Foreign Minister Jaime Gama said. "That means ... the possibility of discussing a practical matter that can contribute to improve the situation in the territory."

The meeting was the first time the two sides had come together since the Indonesian President Suharto resigned in May.

"It's a breakthrough in the whole process of 15 years [of] negotiating nothing," said Mari Alkatiri, FRETILIN (Revolutionary Front for East Timor Independence) secretary for external affairs. "It's the first time that both sides recognize that the East Timor people have to be involved in this whole process."

East Timor resistance leader and Nobel Peace Prize laureate Jose Ramos-Horta welcomed news of the agreement.

"It is what I have been defending for years," he said, "a dialogue with no preconditions."

But Ramos-Horta said no agreement between the two countries could be final without a popular vote of the people of East Timor. Those sentiments were echoed by Roman Catholic Bishop Carlos Belo, co-winner of the 1996 Nobel Peace Prize with Ramos-Horta.

"The people want a referendum," Belo said, "and I go along with what the people choose."

The two days of talks resulted in other developments: Indonesia pulled more troops out of East Timor as the talks ended, Indonesia and Portugal agreed to establish "interest sections" in friendly embassies in each other's capitals by the end of 1998 and to relax their visa policies. Portugal and Indonesia currently have no diplomatic relations.

The United Nations also said it hopes to establish a human rights office in Jakarta soon.