The spectre of Southeast Asian terrorism loomed over talks today between Prime Minister Dr Mahathir Mohamad and Indonesian President Megawati Sukarnoputri.

The two leaders have brought strong delegations to the annual consultations on a host of issues ranging from illegal migrants to trade, tourism, pollution and unlawful logging.

"But terrorism is proving to be a new challenge to these two neighbours," Indonesia's chief counsellor Soepeno Sahid told AFP ahead of the talks in the Sarawak state capital Kuching.