INDONESIA: Al-Qaeda's New Proving Ground

Until the moment their world came apart on Oct. 12, the surfers and club kids who flocked to the idyllic resort of Bali had little reason to believe they were in any particular danger. The U.S. had issued a general travel advisory about increased al-Qaeda activity around the globe. But the possibility that terrorists would strike Bali, a Hindu island in mostly Muslim Indonesia, seemed so remote that several officials from the U.S. embassy in Jakarta decided to spend their Columbus Day weekend there; one of them was relaxing just outside the Sari Club an hour before it blew up.

The scale, deadliness and timing of the Bali bombings were unanticipated, but they did not come as a complete shock to U.S. counterterrorism authorities. U.S. intelligence sources told TIME that in several meetings with Indonesian President Megawati Sukarnoputri since early September, Administration officials have informed her that the U.S. had evidence that al-Qaeda had established a major presence in Indonesia. They pressed her to arrest Islamic militants they believed were linked to Osama bin Laden's network, including Abubakar Ba'asyir, the alleged spiritual leader of Jemaah Islamiah, a radical Islamic group suspected of terrorist attacks across the region. Two days before the bombings, U.S. Ambassador Ralph Boyce told Megawati that if she did not begin cracking down, the U.S. would close its embassy, which might drain Indonesia of American investment and devastate its economy. "We put it to them very hard," says a senior State Department official.

It took one awful night in Bali for the message to get through. The Megawati government last week acknowledged that al-Qaeda is active on Indonesian soil, granted intelligence authorities the power to interrogate suspected terrorists without proof of wrongdoing and finally placed Ba'asyir under arrest. But the Bali attacks suggest it may be too late to prevent al-Qaeda from making the vast Indonesian archipelago a new sanctuary. "We've been talking with them for a long time about the seriousness of the problem," Deputy Secretary of Defense Paul Wolfowitz, a former ambassador to Indonesia, told TIME. "There's obviously a lot more to do, and maybe this will serve as a wake-up call for them."

Though the vast majority of Indonesians practice a moderate form of Islam, the country is an attractive haven for Muslim extremists. Monitoring terrorist activity in a swath of territory that spans more than 13,000 islands would test the mettle of any government, let alone a democracy as young and fractious as Indonesia's. Since the start of her tenure last year Megawati has shied away from trying to snuff out the extremist threat, in part to placate religious conservatives like Vice President Hamzah Haz, Megawati's likely opponent in the 2004 presidential race, who has long supported radical groups and has denied that there are any terrorists in Indonesia.