BALI, Indonesia - Prime Minister Dr Mahathir Mohamad arrived here Wednesday for talks expected to focus on the government's crackdown on illegal workers, which has sent hundreds of thousands of Indonesians scurrying home to avoid jail terms and whipping.

Mahathir was to meet Indonesian President Megawati Sukarnoputri later Wednesday and hold formal talks with her Thursday.

More than 300,000 illegal immigrants, mainly Indonesians, have left Malaysia under a four-month amnesty program to escape jailing and caning under tough new immigration laws which came into effect Aug 1.

They are returning to a country where an estimated 30 million lack full-time work and another 7.8 million have no job at all. In more prosperous Malaysia the exodus has led to a severe labour shortage in the construction, plantation and services sectors.

Indonesia hopes to persuade Malaysia to let many illegals stay until their status can be legalised and to allow the speedy return of those who have already come home.

Foreign Minister Syed Hamid Albar told journalists at the airport while waiting for Mahathir's arrival that relations between Indonesia and Malaysia remained strong despite the case of the illegal immigrants.

"Our relations are very good and firm, and it would not be marred by any incident that has nothing to do with our long term relations," Albar said.

Back to Malaysia

"We ask that the more than 300,000 Indonesian labourers still in Malaysia not be returned home first," Vice President Hamzah Haz told reporters Wednesday.

"It would be enough to get their immigration matters, for example, processed in Kuala Lumpur or Johor ... those who are now here, we will quickly administer their immigration matters so they can work again if there are those who still want to work in Malaysia."

Haz, speaking on the sidelines of an economic seminar, said: "We are optimistic. God willing. Malaysia also needs manpower."

The visit is part of an annual dialogue between leaders of the neighbouring countries.

Megawati was scheduled to host a banquet Wednesday evening at the Tampak Siring presidential summer palace on the resort island.

After talks Thursday between the government leaders and their delegations, the two sides are scheduled to sign memoranda of understanding on women's empowerment and family development, cooperation on immigration affairs, agreement on gas sales and purchases and setting up an Indonesia-Malaysia business council.

Natural gas supply

Mahathir and Megawati are due to attend a function marking the supply of Indonesian natural gas to Malaysia.

Indonesia's state energy firm Pertamina will begin piping gas from the Natuna field in the South China Sea to Malaysia on Thursday under a deal expected to earn the Jakarta government US$2.9 billion over two decades.

The two leaders, plus Thai Prime Minister Thaksin Shinawatra, are also scheduled to witness the signing Thursday of an agreement setting up the International Tripartite Rubber Corporation.

The alliance grouping the world's top three rubber producers is aimed at boosting world prices.