Signs that the rift between the two countries was reaching healing point came as Abu Kamaradin, the Malaysian High Commissioner in London, hinted in a BBC Radio 4 interview that intensive diplomatic exchanges were in progress. Mr Kamaradin said he hoped the dispute could be amicably resolved.
Richard Needham, the trade minister, delivered the tough talking as he accused the Sunday Times of 'fanciful exaggerations' that needlessly risked tens of thousands of jobs all over Britain.
It was the first time the Government has publicly denounced in such forceful terms the actions of the paper and its editor, Andrew Neil, in alleging corruption in Anglo-Maylasian trade.
In a separate disclosure, a legal opinion for the World Development Movement, a UK Third World pressure group, says there is an 'overwhelming probability' that Douglas Hurd, the Foreign Secretary, acted unlawfully in granting aid to the Pergau dam project.
Geoffrey Bindman, a leading constitutional and human rights solicitor, has advised that Mr Hurd is likely to have acted outside his powers in the 1980 Overseas Development and Co-operation Act because benefiting the Malaysian economy or the welfare of its people was not the predominant purpose of the Pergau aid.
Tom Clarke, Labour's spokesman on development and co-operation, yesterday wrote to John Major asking whether legal advice was sought before he joined in giving the expenditure the go-ahead, against the advice of the Overseas Development Administration that the project was a 'bad buy'.
A Sunday Times article led Mahathir Mohamad, the Malaysian Prime Minister, to ban British companies entering trade deals with the Malaysian government.
Mr Kamaradin said: 'What we wanted very much was to have fair reporting by the British press and we are looking at the positive signs in the sense that we are seeing some positive reporting rather than the innuendo and speculation of the past few weeks.' Both countries wanted things to be normal again.
Mr Needham appeared to supply part of the quid pro quo for the softening of the Malaysian line as he told the programme: 'The Malaysians are entitled to fair and factual reporting instead of the bombast we get from Mr Neil in the Sunday Times.
'. . . to drag up a story from nine years ago which says that some middleman offered a British company money in return for an order the British company might get and which would then be paid to the Malaysian Prime Minister, and it turned out that the order was never got and the amount was derisory and the whole thing clearly never ever happened . . .'
'Then to criticise your potential customers like that, and to go on from that, like Mr Neil has done, and liken the Malaysian government to Hitler and make extravagant claims over what happened over the Pergau dam tends to humiliate the Malaysians and makes it extraordinarily difficult for our companies to do business.'
Samy Vellu, the Malaysian energy minister, meanwhile appeared to give some support to allegations that the Pergau dam was uneconomic and a waste of British taxpayers' money. He said it would have been cheaper if Malaysia had not given the contract to Balfour Beatty in exchange for a loan that ultimately soared to pounds 305m at less than 1 per cent interest.
Meanwhile, the former Tory minister, Lord Prior, who is visiting Malaysia in his capacity as chairman of GEC, is expected to report back to Downing Street.
Letters, page 15