Malaysia is considering a RM3.8 billion arms deal that calls for it to commit part of the country's gold reserves to help finance the purchase of warships and other defense equipment, a report said today.

Under the deal, British defence contractor BAE Systems PLC would arrange financing for the arms purchases with a loan secured by gold certificates issued by the Malaysian government, the Asian Wall Street Journal reported, citing people familiar with the plan.

Other aspects of the BAE-initiated proposal, such as the tenure of the proposed loan and the specific details of the equipment Malaysia intends to purchase, have not been finalized, it said.

Commenting on the report, Defence Minister Najib Abdul Razak told the official Bernama news agency Malaysia had not made any decision on the proposal but it would not be out of the ordinary if the government were to consider an arms deal with a loan secured by gold certificates.

"It's still very initial and unsolicited," Najib said of the proposal.

A spokesman for BAE Systems in London acknowledged that the company is in discussions with the Malaysian government over its defense requirements, but declined to elaborate or to discuss the arms-financing proposal, the paper said.

On a buying spree

Malaysia, which has announced a major arms build-up in stages over the past few years, said last July that it had set aside an extra RM1.609 billion in 2004 for weapons purchases, including submarines, tanks and helicopters.

Najib said then that a large slice of the money - RM731.1 million - would go towards upgrading the Royal Malaysian Navy's power with Scorpene submarines, Fennec and Super Lynx helicopters and new patrol vessels.

Another RM523.6 million was for the army, which would acquire main battle tanks and air defence systems, Najib said.

Malaysia has already announced agreements to buy Russian fighter jets, French submarines, British and Russian missile systems and Polish attack tanks.

The naval upgrade comes against the background of increasing concern over the possibility of terrorism in the Malacca Straits, one of the busiest shipping lanes in the world which funnels 50,000 vessels a year between the biggest economies of the West and the East.

The narrow waterway slicing peninsular Malaysia from Indonesia's sprawling Sumatra island, a hunting ground for pirates from ancient times until today, carries a third of global trade and most of the oil needs of Japan, South Korea and China.

Malaysia has denied that its weapons build-up could spark an arms race in the region, saying the purchases are simply designed to upgrade its defences and that it has no aggressive intentions.