Malaysian anti-smuggling authorities have detained 11 Burmese nationals after intercepting two boats carrying contraband diesel fuel worth RM500,000.

Two Malaysians were also arrested in what the authorities suspect was part of a wider smuggling operation in illegally-obtained Malaysian diesel, which is heavily subsidised, the New Straits Times newspaper said.

Police seized 275,000 litres of diesel as it was being transferred from a locally registered boat to the Burmese vessel at a trade wharf in Butterworth, in Penang.

"We confirmed that the diesel was government-subsidised," said M Guna Seelan of the trade enforcement division.

"Initial investigations showed that the local company had illegally obtained the subsidised diesel and sold it to foreign vessels," the New Straits Times quoted him saying.

It was not clear where the contraband diesel was headed, but hikes in the price of fuel in Burma on Aug 15 doubled transport costs overnight.

The sharp rises sparked weeks of rare protests in the military-ruled country, and the junta has reacted by arresting about 150 people, Amnesty International has reported.