He warned that the negotiations appeared to be "going nowhere" and said it was "unfair" of Australia to offload its asylum-seeker problem on East Timor -- the region's poorest and most fragile country.
Once East Timor -- one of the world's newest democracies -- became more stable and prosperous, the request could be considered, but now was not the right time, the veteran Timorese politician said.
Although sympathetic to Canberra's concerns, he warned that if the proposal were adopted, it risked causing deep divisions within East Timor, still fragile as it recovers from bloody political violence four years ago that resulted in the deployment of an Australian-led peacekeeping force to restore law and order.
"It's not welcome, and I do believe I'm reflecting the views of the parties and all Timorese people," Mr Carrascalao said.
"I don't think this plan will be allowed to go ahead. We're also facing another problem, the attitude of our other neighbour, Indonesia, and Indonesia has to be consulted on this."
Foreign Minister Stephen Smith said yesterday talks would continue with Dili, but "within the constraints of the caretaker provision", which rules out any agreement being reached during the election campaign.
"So far as asylum-seekers are concerned, let me make a couple of general points," Mr Smith said.
"Firstly, you have the government progressing its offshore processing centre proposal, and within the constraints of the caretaker provision, that will continue in the course of the campaign.
"I was in Indonesia, in Jakarta last week. I had discussions with my Indonesian counterpart, Marty Natalegawa. Yes, we had agreed that I would have further discussions with him in Hanoi during the ASEAN-related meetings, and I'd also agreed with Zacarias da Costa, the Foreign Minister from East Timor, that he and I would have discussions in Hanoi as well."