Mr Clark's remarks will open Douglas Hurd, the Foreign Secretary, to further questions by MPs this week about how the overseas aid budget was used to secure overseas contracts for prestige projects, in parallel with arms deals.
'The pounds 200m in fact was a soft loan that went to support the construction of a dam from which British civil engineering companies benefited,' he said.
Mr Clark, who is also a key witness in the Scott arms-to-Iraq inquiry, made it clear that many people believed securing contracts and British jobs was a better use of the overseas aid budget. 'It was a fantastic deal. We had been shut out of the Malaysian market for the most part of a decade. No law was broken, no secondary legislation was breached and nobody in public office in this country was bribed, so what is the fuss about?' Mr Clark said on BBC radio.
The Pergau dam project received pounds 234m in aid from the Overseas Development Administration plus pounds 45.8m in 'soft loans' at low interest rates from the Export Credit Guarantee Department. In March 1988, Lord Younger, then Secretary of State for Defence, signed a protocol linking aid as a percentage of a pounds 1bn arms contract.
Mr Clark's admission that development aid was used to facilitate trade was last night condemned as 'an abuse of the aid budget' by Bob Wareing, a Labour member of the Foreign Affairs Select Committee, which is investigating the Pergau dam affair. 'What I'm concerned about is any linkage there might have been with an arms deal and also the inordinate share of a stretched overseas aid budget which went to countries which are certainly not among the poorest in the world,' he said.
Foreign Office sources said yesterday that there had been a 'a frantic attempt to pull back' in March 1988, after Lord Younger signed a protocol with the Malaysian government linking the aid package for the dam with an arms deal. The select committee has been given a summary of the Foreign Office papers, which show that Malaysia would be granted overseas aid as a percentage of the value of the arms it bought, in spite of repeated denials by ministers that this was happening.
'The alarm bells rang when George Younger returned,' a source said.
Lord Howe, the former Foreign Secretary, insisted on the memorandum being retracted. Lord Younger was forced to write to the Malaysian government in June 1988 saying that international rules forbade such a deal in the terms they had envisaged. But Margaret Thatcher wrote in August to Mahathir Mohamad, the Malaysian Prime Minister, confirming the aid and also expressing the hope that the defence deal could be signed.
Mr Hurd, who admitted on Friday that the arms and aid did become 'entangled', will be questioned by the committee on Wednesday, and Baroness Chalker, Minister for Overseas Development, will give evidence on Thursday.
Committee members yesterday confirmed they would also want to know whether the overseas aid budget was plundered to pay British Airways pounds 2.1m in compensation for relinquishing a landing slot at Heathrow Airport to Malaysian Airlines, as part of the deal demanded by Dr Mahathir.
Some MPs will press for Baroness Thatcher to give evidence over her role in the Pergau dam affair when she was Prime Minister.
Other witnesses are to be questioned over whether the Government operated a secret policy of linking aid, trade and defence sales with Third World countries that 'bought British' throughout the 1980s and early 1990s.
The select committee has decided to widen its original remit beyond investigating the Pergau dam affair. The committee will also examine the government's entire Aid and Trade Provision (ATP) programme, administered by the ODA and Department of Trade and Industry since it was introduced in 1978.