1. Good press here on recent statements by you. Statements intelligently reported. Indonesian situation is becoming main interest. Emphasis you placed on welfare approach important as Australia not prepared for any direct responsibility involving use of Australian forces. Prime Minister well aware Australian interests in preventing flare up and securing stability but strongly believes we must avoid giving impression we are prepared to intervene in ways other than diplomatic. General approach we are following is to stress vital interests but to keep free of military obligations. This is delicate course but with Mountbatten's assistance we can probably succeed. Mountbatten seems to agree with our general views and gives impression he is not getting United Kingdom support against Dutch pressure. He is particularly concerned to keep Dutch out for present but Foreign Office representative Dening went as far as telling Indonesians that British forces would get out when Dutch really ready to enter. Such an approach will destroy basis of negotiations.
2. Soekarno's influence seems to be declining and he may be ousted by extremists unless the Dutch show full readiness to conduct negotiations with him immediately and on a realistic basis. Even so the British will need to give him and other moderates greater stature as an alternative to finding extremists in the saddle.
Both British and Dutch must also be prepared to bring extremists into the negotiations along with moderates. Unless the above conditions are faced, civil war is likely to develop.