(AFP) - Malaysia's economy has weakened after last month's terror attacks on the US but remained stable with low inflation and strong reserves, Prime Minister Mahathir Mohamad said today.

His comments came amid the release of gloomy industrial production figures for August, with manufacturing output falling 10.5 percent from a year earlier, hurt by the slowing global economy.

Mahathir told parliament that Malaysia was not spared from the US disaster, with exports falling, the stock market plunging 10.9 percent between Sept 11 and 28, and foreign investment likely to dry up.

"The transport, insurance and tourism industries are also affected and costs of trade will go up due to increased freight and insurance rates," he was quoted as saying by Bernama news agency.

But the premier noted that inflation remained low and the country's international reserves remained strong at 29.7 billion dollars as of September 29, sufficient to finance 4.6 months of retained imports.

"This means Malaysia is still a competitive nation... the government has the capacity and the means to overcome this new economic crisis," he said.

Mahathir, who is also finance minister, said a new RM4.3 billion ringgit stimulus package announced last month would raise domestic spending and offset a slowdown in external trade.

The new spending followed a three billion ringgit supplementary budget unveiled in March.

The premier said allocations for next year's budget, which he would unveil in parliament on Oct 19, would take into account US economic developments.

Fall in industrial output

The government will for a second time revise its official growth forecast for this year when it unveils its budget. In March it cut its growth estimate from seven percent to between five and six percent amid the US slowdown.

In a statement, the Statistics Department said Malaysia's industrial production in August fell 7.3 percent from a year earlier and was down 3.5 from the previous month, due to declines in manufacturing and mining.

The industrial production index measures manufacturing, mining, including oil and gas production, and electricity generation.

The department said August's manufacturing output plunged 10.5 percent from a year earlier and was down 3.9 percent from July. Mining dipped 0.8 percent year-on-year and fell 4.8 percent from July.

But the electricity sector surged 12.3 percent from a year earlier and was up 1.5 percent from July.

In the eight months to August, the department said industrial production fell 2.2 percent from a year earlier, dragged down by a 4.2 percent contraction in manufacturing.

Electricity and mining however, expanded 9.7 percent and 2.4 percent respectively in the eight-month period, it added.