Student-led demonstrations against the multi-million dollar purchase drew thousands this week in the capital Dili, with demonstrators and police clashing two days in a row.

Unappeased by the last-minute reversal, around 2,000 demonstrators gathered near the parliament building in Dili for a third straight day on Wednesday, according to an AFP journalist.

"Rumours are that the cars are already on the way," protester Trinito Gaio, 42, told AFP.

"So this is why all of these students and myself are here today -- to make sure my tax money is not going in the... wrong direction."

The controversy stemmed from a $4.2 million budget item, approved last year, to purchase Toyota Prado SUVs for each of the country's 65 members of parliament. 

The tender was due to be completed in September, according to an official parliament document. 

The plan triggered widespread anger in a nation where over 40 percent of the population lives in poverty, according to the World Bank.

Facing mounting protests, parliament made a sharp U-turn on Tuesday.

It unanimously adopted a resolution to "cancel (the) new vehicle procurement process listed in the 2025 budget". 

A statement added that parliament's general secretariat must now "adopt administrative and financial measures aimed at maintenance and efficient use" of vehicles already in the MPs' use. 

The protests on Monday and Tuesday saw demonstrators hurl rocks at police, who responded with tear gas. 

President Jose Ramos-Horta told reporters on Tuesday that there would be "no tolerance" for violence during the demonstrations.

The unrest occurred while Prime Minister Xanana Gusmao was travelling to London for meetings on land and maritime borders. He is expected to return on September 22.

Timor Leste, which gained independence from Indonesia in 2002 after more than two decades of occupation, continues to grapple with high inequality, malnutrition, and unemployment. 

Its economy remains heavily reliant on its oil reserves.

Deadly riots erupted in Indonesia last month after a video of a police vehicle running over a motorcyclist ignited public anger over lawmakers' lavish perks, low wages and unemployment.