Australian Aboriginal leaders redoubled their threats to disrupt the Olympic Games yesterday after police descended on an indigenous neighbourhood in Sydney and arrested 16 people suspected of drugs-related offences.

Australian Aboriginal leaders redoubled their threats to disrupt the Olympic Games yesterday after police descended on an indigenous neighbourhood in Sydney and arrested 16 people suspected of drugs-related offences.

Community activists claimed that the raids in the suburb of Redfern were racially motivated and aimed at clearing a notorious, run-down housing project known as the Block, one of Sydney's worst eyesores, before half a million tourists arrive for the Olympics.

"All bets are off," said Lyall Munro, who is co-ordinating mass protests at the Olympics, which open on 15 September. "Black Australia will rise up. We will march and we will squat and we will put 'embassies' in every park in the city." Tent "embassies" are intended to draw tourists' attention to the health and social problems of indigenous communities.

Racial tensions were further inflamed yesterday by the dismissal of a landmark case against the Australian government by two members of the "Stolen Generation" - Aboriginal children who were forcibly removed from their families under an officially sanctioned policy in force until the late Sixties.

The federal court, sitting in Darwin, accepted that Lorna Cubillo, 62, and Peter Gunner, 53, were neglected and mistreated in the Northern Territory children's homes where they grew up, with Mr Gunner sexually assaulted by one missionary and Ms Cubillo also "viciously assaulted". But the judge ruled that there was insufficient evidence that the authorities had not acted in Ms Cubillo's best interests, and said it had been at the request of Mr Gunner's mother that he was educated in a white institution.

The judgment - delivered after a 107-day hearing that took evidence in seven towns - was a bitter blow to thousands of Aborigines separated from their parents under the "assimilationist" policy. Had the pair been successful, the government would have faced multi-million-dollar compensation claims.

In Redfern, to jeers from residents, more than 120 police officers in bullet-proof vests smashed their way into five homes and seized drugs and cash. Seven men, eight women and one juvenile were charged with a total of 54 offences.

The Redfern police superintendent, Peter Parsons, said the operation was similar to previous raids carried out in the suburb and had been helped by information from residents.

The premier of New South Wales, Bob Carr, tried to calm community anger. "This is targeted intelligence-based policing directed at drug dealers," he said. "It's got absolutely nothing whatsoever to do with the Olympics and it's rather ridiculous to make that claim."

In another move likely to provoke a backlash, South Sydney Council began legal action yesterday to evict protesters who have set up an Aboriginal "tent embassy" in Victoria Park, near the University of Sydney.