This dissertation examines the Indonesian state’s capacity to respond to separatist challenges from Aceh in the period from May 1998 to May 2003. It is a political study of centre-periphery relations seen from the perspective of the centre. With its theoretical focus on the capacity of democratising regimes to deal with their national identity problems/ territorial disputes, this study of Indonesia’s efforts to contain the Aceh conflict through its security and autonomy policy approaches will contribute to the comparative study of post authoritarian regimes contending with internal conflicts. The central thesis is that although Indonesian state capacity was reduced by the change of regime in 1998 and the consequences of the 1997 national economic crisis, Jakarta did have a window of opportunity through which to democratically accommodate the Acehnese people after the initiation of democratisation. This opportunity to implement democratic reforms only existed in Aceh for a limited period after regime change. The more time that elapsed after Suharto’s resignation, the more GAM gained political influence and the more the TNI gradually reasserted itself as the defender of national unity under successive weak civilian governments, with the result that depredations against the civilian population increased and the state’s capacity to effectively govern further declined. In treating the methodological approaches of structure and agency as symbiotic and inter-related, the study views Indonesian state capacity both in terms of the political will and interests of those who shaped Aceh policy choices and their material conditions and institutional networks. That is, the structural and functional constraints imposed by the New Order’s authoritarian legacy and the national economic collapse, as well as the general lack of political will in Jakarta to pursue a negotiated settlement in the five years after the initiation of democratisation are seen as the primary reasons for the escalation of conflict in Aceh in the post-Suharto era. In this, a reoccurring theme in the thesis is that despite the adverse material preconditions facing Indonesia’s political leadership at the point of regime change, with enough political will and determination, a peaceful settlement to the Aceh conflict was not only possible, but achievable, as the successful post tsunami peace process with GAM under Susilo Bambang Yudhoyono’s presidency would later show.