The decision also puts hundreds, possibly thousands, of jobs at risk among UK contractors bidding for defence, construction and utilities orders in Malaysia.
The Association of Consulting Engineers estimated that work worth up to pounds 3bn could be lost. Share prices of leading British companies involved in Malaysia, such as GEC and Trafalgar House, tumbled as news of the retaliation over the Pergau arms-for-aid scandal hit the financial markets.
But the 150 other British companies in Malaysia will also suffer. They will not be able to pick up valuable subcontracting and consultancy work.
British exports to Malaysia reached pounds 965m last year, making it our biggest trading partner in South-east Asia, and included pounds 182m worth of electrical machinery, pounds 159m in telecommunications and engineering equipment and pounds 102m worth of motor vehicles. Imports were pounds 1.4bn.
About 5,000 expatriate workers and their families live in Malaysia. Most are reliant on the big-ticket deals now being outlawed.
The first major casualties will be Balfour Beatty, Trafalgar House and GEC Marconi, the three British members of the Anglo-Japanese consortium developing the new Sepang airport, 25 miles (40km) outside Kuala Lumpur. Their contracts, worth at least pounds 400m, will now be terminated.
British Aerospace has just begun delivery of the first of 28 Hawk military trainer jets worth pounds 300m. That contract is not thought to be a risk since it was signed in 1988, but BAe had been hopeful of supplying Malaysia with its Rapier ground-to-air missile system.
'There is a threat to future business which is why we have to be very careful about not offending Malaysia,' a spokesman said.
Hopes that Malaysia would place a possible order for 24 fast naval patrol boats with a British warship yard have also been dashed.
GEC has total orders with Malaysia worth more than pounds 500m, including a pounds 400m contract to build two naval frigates at its Yarrow yard. A spokesman said: 'We are still trying to assess the situation and seeking clarification, but what they appear to be saying is that existing contracts are not affected.'
However the loss of the airport contract will deny GEC orders it had hoped to win for air traffic control systems, communications equipment and transport systems.
Trafalgar House is also a contractor on the Pergau dam, while its John Brown engineering subsidiary is building two gas-fired power stations worth pounds 185m. 'Malaysia was one of four or five countries worldwide in which we saw major prospects,' a spokesman said. 'As of today that is no longer the case. There is a lot of work there which we will not now get a fair crack at. There will be quite a knock-on effect for jobs.'
Rolls-Royce, the aero-engine and power engineering group, entered into a joint venture with the Malaysian company EPE Power Corporation last Monday to supply power transmission equipment. A spokesman said: 'It is really a question of waiting and seeing what will happen.' The company is also building 11 electricity substations in Malaysia and manufactures the Adour engines for the BAe Hawk order.
The electricity generators National Power and PowerGen warned that tremendous opportunities could be lost. Both have been sounding out potential power station orders.
British Gas may also be affected. It has an offshore exploration licence in the Sabah region and is involved in a joint venture to build a gas-fired power station in Kuala Lumpur. A spokesman said: 'To our knowledge private contracts are not an issue.'
The construction firm Bovis, part of P & O, is building a theme park in Malaysia and a property development in Kuala Lumpur, but doubted that either venture was at risk.
Taylor Woodrow, another construction company, has several private sector projects in Malaysia including a pounds 225m contract to build a light transit railway in Kuala Lumpur with AEG of Germany. John Laing is involved in a pounds 150m project to build 12 hospitals and a pounds 25m airport contract through a local company, but said it thought neither contract would be affected.
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