Sun May 21, 1:24 AM ET

SYDNEY (Reuters) - Australia is prepared to recognize Indonesian rule over troubled Papua province in a security treaty being planned by the two nations, Foreign Minister Alexander Downer said on Sunday.

Relations between the neighbours have been severely strained by Canberra’s decision in March to grant 42 Papuans asylum after they arrived by boat. Jakarta recalled its ambassador in protest.

Leaders of Australia and Indonesia, facing their most serious disruption in relations since Australia led a U.N. force to end bloodshed in East Timor after its 1999 independence, plan to meet soon to discuss the dispute.

Downer told Australian Broadcasting Corp. television that both sides were working on a new security agreement that would recognize each nation’s territorial integrity.

"We’ve always said in the drafts we’ve provided, there should be a mutual recognition of each other’s territorial integrity. And that, of course, would include a recognition of Papua’s integration into Indonesia," Downer said.

"We would be very happy with a provision where Australia formally recognises Indonesia’s territorial integrity."

The Papua issue is highly sensitive in Indonesia, an island archipelago which has for decades fought secessionist movements.

Papuan independence activists have campaigned for more than 30 years to split from Indonesia, while a low-level rebellion has also simmered. Human rights groups accuse Jakarta of widespread abuses there, and the 42 Papuans who sought asylum said they feared becoming victims of genocide. Jakarta denies such charges.

Australia’s decision to grant refugee status to the Papuans led to Jakarta accusing Canberra of supporting Papua’s independence movement.

Talks between foreign ministers from both nations last week eased tensions, with Downer again publicly stressing Australia recognised Indonesian rule over Papua.

The last security deal between Australia and Indonesia was ripped up when Australia led the U.N.-backed force into East Timor.

Indonesian Foreign Minister Hassan Wirajuda said on Saturday the new security pact was expected to guarantee Australia will not interfere in Indonesian affairs.

He said a draft being worked on included a clause expressing Australia’s commitment to Indonesian territorial integrity.

Wirajuda said Indonesia’s ambassador should return before Australian Prime Minister John Howard and Indonesian President Susilo Bambang Yudhoyono meet.

He declined to say when and where the talks would be held.