INTERVIEW-UPDATE 1-Timor wants to diversify $3 bln state fund

* Will have $3 billion in wealth fund by end of 2008

* Plans to diversify out of U.S. Treasuries

* May hire investment managers

(Adds detail, background)

By Neil Chatterjee and Yvonne Cheong

SINGAPORE, May 24 (Reuters) - East Timor will have $3 billion by end-2008 in a sovereign wealth fund and may hire fund managers to diversify its U.S. Treasury holdings into better performing assets, President Jose Ramos-Horta told Reuters on Saturday.

Ramos-Horta said the fund, which comes from the tiny Southeast Asian state's revenues from energy production, is losing money because of the fall in the U.S. dollar and low interest rates, and wants better returns to rebuild the country.

"We are looking at diversifying into other equities investments like in Europe, in safe investments -- a conservative investment portfolio -- but that still generates more interest than U.S. Treasury bonds," Ramos-Horta said in an interview in Singapore. "One option is to hire investment fund managers, not one -- two or three -- that will compete with each other in investing our money," he said. "It would be contracted, because we don't have our own expertise," he said, without specifying possible firms. A study would be done as soon as possible, he added.

East Timor, Asia's youngest nation that just marked six years of independence from Indonesian occupation, is struggling to achieve stability despite its rich oil and gas resources, though record crude prices CLc1 over $130 a barrel should be a boon.

Ramos-Horta, the 1996 co-recipient of the Nobel Peace Prize who survived an assassination attempt in February, said the country's budget for this year was $540 million, up from about $80 million five years ago.

Its top aid donor is Australia, and Ramos-Horta said it was also looking to tap Middle Eastern countries for "soft loans".

"We can borrow money from Kuwait at about 1 percent interest while our investment portfolio can generate 4 to 6 percent interest," he said, adding the portfolio and the country's budget would be increased by 2010 but without giving figures.

He said the country was earning $200 million a month from the Bayu Undan oil field, after its main stakeholder ConocoPhillips (COP.N) paid off its capital investment 6-7 years ahead of time.

But he said it would consider cutting future royalties from its prize Greater Sunrise liquefied natural gas (LNG) field, to encourage bringing the gas to East Timor instead of Australia for processing, but only if this made commercial sense. The field, being developed with Australian Woodside (WPL.AX), is expected to produce from 2012-2014.

"We are now commissioning an independent study that would enable us to look seriously in depth on the pros and cons on bringing in the pipeline to Timor Leste," he said. "We don't want to do it for the purpose of national pride."

He said it would cost $2 billion to bring the pipeline and build infrastructure on East Timor, but cost less to Australia, which has experience of large LNG projects off its Northwest coast. Either way, he said, the country wanted a stake.

"Definitely yes, we are considering the possibility of setting up our national oil company, but that is not final because we don't have enough people to manage properly a simple ministry ... We don't want the oil company to be a source of corruption and become a power -- a state within the state."

It may also launch new blocks onshore for oil exploration.

By 2009 he wanted to start major infrastructure projects such as roads, housing, telecommunications and power supply, with plans to spend $100 million a year over 10 years, a "significant portion" of which could come from its investment fund. He said Chinese investors were also interested in infrastructure deals.

Other major challenges were reforming the army and police, creating a low tax regime to attract investors, improving education and creating jobs, calming security fears and enabling 150,000 who fled violence in 2006 to return to their homes. Ramos-Horta, unshaven and casual in a shirt sitting behind a desk overlooking the greenery of Singapore's Botanic Gardens, said East Timor was shocked by the assassination attempt but now the rebels responsible had surrendered he saw a chance for peace.

"If this is the price I had to pay for people to realise the cost of violence, then so be it." (Editing by Lincoln Feast)