East Timor will tear up an oil and gas treaty with Australia that has been at the centre of espionage allegations, international arbitration and a bitter diplomatic dispute.

The 2006 treaty relates to a temporary maritime border in the Timor Sea, and access to oil and gas deposits worth an estimated $40 billion.

Photo: The disputed territory contains large oil and gas deposits worth an estimated $40 billion. (ABC News)

The agreement had outlined a 50-year freeze on negotiations for a permanent border.

But East Timor, also known as Timor-Leste, had claimed the treaty was invalid given Australian intelligence operations in 2004.

Diplomatic relations have been tense since East Timorese officials accused Australia of spying on cabinet ministers amid negotiations on the treaty to divide the oil and gas fields.

Today, a joint statement from both countries said the Treaty on Certain Maritime Arrangements in the Timor Sea would no longer apply, after a three-month transition period.

"The Government of Australia has taken note of this wish and recognises that Timor-Leste has the right to initiate the termination of the treaty," the statement said.