East Timor has dropped its spying case against Australia as part of negotiations to resolve the long-running dispute over permanent maritime boundaries in the Timor Sea.

After a week of conciliation talks in Singapore, both countries announced East Timor had agreed to drop the spying case as part of the "good faith" negotiations to resolve the underlying disagreement over maritime boundaries.

Key points: Spying case dropped as part of broader goal to resolve maritime boundary dispute

Spying case dropped as part of broader goal to resolve maritime boundary dispute Case related to alleged espionage by Australia in 2004

Case related to alleged espionage by Australia in 2004 September deadline to resolve overall dispute

In a joint statement, they also said they would aim to resolve permanent maritime boundaries by September this year.

The talks are a result of East Timor's move last year to take Australia to the United Nations for compulsory conciliation in order to resolve the boundary dispute.

"Today's announcement shows the UN-backed conciliation process under the UN Convention of the Law of the Sea is bearing fruit," Professor Michael Leach from Swinburne University said.

The espionage case related to allegations Australia's overseas spy agency, ASIS, spied on East Timor during negotiations over the 2006 CMATS (Certain Maritime Arrangements in the Timor Sea) treaty that governs the carve-up of revenue from the Greater Sunrise gas field in the Timor Sea.

East Timor alleged the espionage gave Australia an unfair advantage in the negotiations over revenue, potentially worth billions of dollars.

Australia accepted decision to tear up treaty

Earlier this month, East Timor told Australia it was terminating the CMATS treaty, a decision Australia accepted.

"The Timorese had been seeking to terminate the treaty through these allegations of espionage," Professor Leach said.

"Now that both parties have agreed to terminate CMATS and that the maritime boundary negotiations will continue, the Timorese no longer see the need to pursue that [the espionage] case," he said.

The CMATS treaty split revenue from the Greater Sunrise field 50/50 between Australia and East Timor, but the agreement delayed negotiations over a permanent maritime boundary for 50 years.

East Timor argues that if the maritime boundaries were decided under international law, most of Greater Sunrise would lie within its territory.

Until recently, Australia had resisted resolving the dispute under international law.

Relations between the governments of Australia and East Timor have been strained as a result of the dispute and hit a low point after the spying allegations emerged in 2013.

"There's been no ministerial visits over the past couple of years and that's a sign of very poor relations between Canberra and Dili at this time," Professor Leach said.

But he said the announcement appeared to be a sign relations were improving.

"We've seen Timor come to the party today dropping two arbitrations against Australia," he said.