By the mid-1980s, he was a major leader. During the early 1990s, Gusmão became deeply involved in diplomacy and media management, and was instrumental in alerting the world to the massacre in Dili that occurred in Santa Cruz on 12 November 1991.
On 30 August 1999, a referendum was held in East Timor and an overwhelming majority voted for independence. The Indonesian military commenced a campaign of terror as a result, with terrible consequences. Although the Indonesian government denied ordering this offensive, they were widely condemned for failing to prevent it.
As a result of overwhelming diplomatic pressure from the United Nations, promoted by Portugal since the late 1970s and also by the United States and Australia in the 1990s, a UN-sanctioned, Australian-led international peace-keeping force (INTERFET) entered East Timor, and Gusmão was finally released. Upon his return to his native East Timor, he began a campaign of reconciliation and rebuilding.
During this time he continually campaigned for unity and peace within East Timor, and was generally regarded as the de facto leader of the emerging nation. Elections were held in late 2001 and Gusmão, endorsed by nine parties but not by Fretilin.
The CNRT allied with other parties to form a coalition that would hold a majority of seats in parliament. After weeks of dispute between this coalition and Fretilin over who should form the government, Ramos-Horta announced on 6 August that the CNRT-led coalition would form the government and that Gusmão would become Prime Minister on 8 August.
On 11 February 2008, a motorcade containing Gusmão came under gunfire one hour after President José Ramos-Horta was shot in the stomach. Gusmão's residence was also occupied by rebels. According to the Associated Press, the incidents raised the possibility of a coup attempt; they have also described as possible assassination attempts and kidnap attempts.