Portuguese traders arrived on Timor around 1515, anxious to take advantage of the island's already lucrative sandalwood trade.Timorese leaders on the coast exchanged sandalwood brought from the mountainous interior for Portuguese guns, cloth and iron tools. 

In the beginning, these Portuguese visits had little effect on the Timorese. Most of the islanders lived in small, relatively isolated villages in the interior, where subsistence agriculture and animist religions predominated. 

Eventually, however, the European influence became more invasive. In the late 1500s, Dominican friars from Portugal established a mission in the major sandalwood port. Not long after that, the Topasses, or Black Portuguese—the offspring of Portuguese soldiers, sailors and traders and women from neighboring islands—began to settle on Timor. They spread Portuguese culture and influence, and soon controlled the local trading networks. 

Soon afterwards, the Dutch began visiting Timor, to obtain sandalwood and slaves. The two colonial powers were soon in conflict, as each tried to extend its influence on the island. The next two centuries were dominated by power struggles between the colonial powers, the Topasses and indigenous Timorese. The official division of the island into West (Dutch) Timor and East (Portuguese) Timor wasn't formalized until 1913. 

In the first 300 years of colonial rule, Portugal showed less interest in East Timor than in any of its other colonies. In the 1860s, Alfred R. Wallace, a British explorer, described the situation like this: 

The Portuguese government in Timor is a most miserable one. Nobody seems to care the least about the improvement of the country, and at this time, after three hundred years of occupation, there has not been a mile of road made beyond the town [Dili], and there is not a solitary European residence in the interior.

Hoping that the colonies themselves could become a significant source of income for the mother country, Portugal began to increase the economic and social development of East Timor. This often entailed heavy-handed tactics like the forced cultivation of cash crops, forced labor to build the territory's infrastructure, and the levying of head taxes. 

Such methods led to widespread resentment and finally large-scale violence, culminating in an uprising that began in 1910, led by a local ruler. By 1912, the rebellion threatened Portuguese control of Dili itself, but it was violently suppressed with the aid of African troops from the Portuguese colony of Mozambique. 

At the same time, the Portuguese administration began cultivating a town-based elite of native East Timorese in order to fill the new administrative, managerial and service-oriented jobs that were being generated by development. These jobs required both education and a colonial perspective, and the Catholic Church helped cultivate both. By 1900, it was running twenty schools that emphasized Portuguese language, geography and culture. 

Despite these development efforts, Timor never became much of an economic asset to Portugal. In fact, it remained one of the most economically backward colonies in all of Southeast Asia. As one historian described it: 

On the eve of World War II the capital, Dili, had no electricity and no town water supply; there were no paved roads, no telephone services (other than to the houses and offices of senior officials), and not even a wharf for cargo handling.

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