While Umno is not in danger of losing in the next elections, the dominant party in the ruling coalition could forfeit its moral authority to rule the country, Singapore Senior Minister Lee Kuan Yew said today.

"It is not unlikely Umno may lose more seats, and even a few more states to PAS, in the next general elections - and it may not be disastrous - but there could be an erosion of Umno's moral authority," Lee told reporters in Kuala Lumpur.

He added that this erosion could be stemmed if Umno adopted 'certain policies'. However, he did not elaborate what these policies were.

During the last general elections in 1999, the Umno-led Barisan Nasional coalition kept its two-thirds majority but lost the state of Terengganu to PAS. It also failed to wrest back Kelantan which has been under the Islamic party since 1990.

Lee also warned that while the influence of militant Islam was not as pervasive as communism of the past, it must be closely monitored.

"We have to watch it carefully because if they take root in Indonesia and they can go up to the islands south of us and if they take root in Malaysia and come to down to Johor. We are vulnerable," Lee said.

Early last month, the Malaysian government arrested 10 individuals under the Internal Security Act for being allegedly involved in the Malaysian Mujahideen Group, a militant movement said to be seeking the violent overthrow of the government.

Among those arrested, seven were PAS activists including the son of PAS spiritual leader and Kelantan chief minister Nik Aziz Nik Mat.

However, PAS denied that it has links to militant groups and refuted allegations that the party advocated militancy.

Private banks

Lee also repudiated accusations that Singapore sabotaged the Malaysian economy during the Asian financial crisis in 1997.

"If the Malaysian economy collapses, we are going to suffer pain and loss. We have so much investments in Malaysia," he said.

During the '97 crisis, Singaporean banks had raised their interest rates to draw Malaysians into depositing their ringgit in the island state. This was said to have had an destabilising effect on the flagging ringgit then.

"It was private banks that raised the interest rates and not the Singaporean government," Lee said.

Lee, who arrived on Sunday on an official state visit, leaves for home today.