East Timor's government has passed a unanimous resolution in parliament rejecting Australia's proposal to establish a centre for asylum seekers there.
Australia's Prime Minister Julia Gillard proposed last week to set up a centre there to process people seeking refuge in Australia.
However, East Timorese leaders showed little enthusiasm for the proposal then, with President Jose Ramos-Horta saying his country should not become a prison for Australia's asylum seekers.
The proposal, announced last week, drew criticism after it was revealed Ms Gillard had consulted East Timor's President, Jose Ramos Horta, on the issue but not Prime Minister Xanana Gusmao.
Ms Gillard said earlier on Monday she wanted to act quickly to establish the centre.
Hours later, ABC Radio reported that East Timor's parliament had voted on the proposal, rejecting it unanimously.
The ABC reports, it is a blow for Labor, which is seeking to show strong leadership on the issue ahead of the election.
NZ open to talks on asylum seekers
Meanwhile New Zealand prime minister John Key says boat people and asylum seekers are a regional problem, and the Government is open to talks with Australia about a regional solution.
But Labour Party Leader, Phil Goff, said there was only a remote possibility asylum seekers would come to New Zealand by boat.