East Timor will abandon the multi-billion dollar oil and gas treaty at the centre of sensational spying claims by Australia.

The two countries issued a joint statement on Monday declaring the deal to be dead, just over four months after East Timor took the unprecedented step to demand confidential conciliation talks with Australia at The Hague.

A protester during a rally last year outside the Australian Embassy in Jakarta, as people showed their support to East Timor in the dispute over oil and gas revenue-sharing with Australia. Credit:AP

Relations between the neighbours have been strained since it was revealed in 2013 Australian spies bugged the cabinet office of the East Timor government in Dili during negotiations for the 2006 treaty.

The extraordinary disclosure of eavesdropping was again catapulted into the headlines a few months later when ASIO raided the home and offices of East Timor's lawyer based in Australia, confiscating documents.