Voting in the newly independent nation got off to a smooth start at more than 700 polling stations, election officials said.
"I woke up very early to take part in deciding my country's destiny," said Justino da Costa, a 53-year-old cab driver who got in line before dawn to cast a vote in the capital, Dili.
Fourteen parties competed in the elections, with the fiercest battle between the CNRT of former resistance fighter hero Xanana Gusmao and the left-leaning Fretilin of ex-prime minister Mari Alkatiri.
The elections follow two rounds of voting this year for the largely ceremonial post of president in the half-island nation of a million people
Campaigning has mostly been peaceful under the guard of 3,000 foreign peacekeepers, though two Gusmao supporters were killed at a rally earlier this month.
The winning party will face immense challenges, though few expressed any clear policies in the run-up to the poll, relying more on the charisma of their leaders to attract voters.
Tens of thousands of people still live in refugee camps following last year's unrest, poverty and unemployment levels are sky-high despite the country's considerable offshore oil and gas reserves and gang violence regularly breaks out.
Gusmao flashed a victory sigh to reporters after casting his vote.
The bearded politician spent years in an Indonesian prison before returning to East Timor when it broke from Jakarta-rule in 1999 in a U.N-sponsored independence ballot.
He became the country's first president, but is now seeking the more hands on job of prime minister by stripping power from Fretilin, the dominant political force since independence.
Several candidates have predicted victory, but analysts do not expect an outright majority for any party, meaning a coalition government will have to be negotiated in the former Portuguese colony.
"We will win an absolute majority, more than 50 percent," said Fretilin's Alkatiri, casting his vote. "We have experience in governing the country. We have plans, programs and the competence to do this. They (the CNRT) have no capacity."
East Timor lapsed into chaos in April and May of 2006 when fighting between police and army forces killed 37 people and drove 155,000 from their homes. Foreign peacekeepers were deployed to the country.
Alkatiri was replaced by Nobel Peace Prize winner Jose Ramos-Horta as prime minister amid the unrest. He insists it was a coup orchestrated by Gusmao and his close political ally, Ramos-Horta.
Ramos-Horta, who won the Nobel for his nonviolent resistance to Indonesian occupation, became president in May after winning a run-off vote against a Fretilin candidate.
"The election process is going smoothly, peacefully all over East Timor, we don't expect any problems, thousands of people are voting, exercising their right," said Ramos-Horta, who arrived to vote wearing jeans and sneakers.
Cirilo Vaz de Carvalho, a 57-year-old farmer with three children, was the first resident to vote at a local elementary school in Dili.
"I voted for CNRT because of the key figure, our national hero, Xanana Gusmao, who brought us independence. I want him to once again liberate us from the problems that divided East Timor in last year's crisis."
In New York, the U.N. Security Council appealed to all people in East Timor "to ensure that free, fair and peaceful parliamentary elections take place."
It called on all parties "to adhere to the principles of non-violence and to democratic and legal processes to ensure that these elections have a unifying impact and contribute to bringing the people of East Timor together."
More than 548,000 people have registered to vote in the polls.
