Malaysia's Prime Minister Abdullah Ahmad Badawi said Friday that energy subsidies would have to be reduced, signalling deeply unpopular fuel price hikes even as the nation heads for elections.

Abdullah told his ruling party, the United Malays National Organisation (UMNO), that Malaysia could no longer afford to spend 35 billion ringgit (10.5 billion dollars) in oil and gas subsidies each year.

"We need to restructure this subsidy," he said in a closing address to UMNO's week-long annual assembly. "We cannot continue like this. The subsidy should be given to those who need it."

"If it increases, we can pay a little more, but the same price for the rich and poor is not fair," he said, without specifying when the subsidies would be reduced.

"There will always be some unhappiness but what we think is that it's just and fair and we need to do it. I think Malaysians are reasonable people and we need to be fair."

Abdullah said that the 40 billion ringgit spent annually on energy and other subsidies was equal to the funds spent promoting national development -- part of Malaysia's plan to achieve developed status by 2020.

"We must do something about this," he said.

Influential Deputy Prime Minister Najib Razak also said the present subsidy situation was untenable and was retarding the expansion of the economy, which independent forecasters tip to grow 5.7 percent in 2007.

"The investment in development and government subsidies are in a ratio of 1:1," he said.

"If we can spend 80 billion ringgit on development investment, we can get 9.0 to 10.0 percent economic growth."

Malaysia imposed its highest-ever fuel price rises in February 2006, citing the spiralling cost of crude oil, and pledged to use the cost savings to boost the country's substandard transport system.

Following the sharp hike, political and civil groups organised rare demonstrations in the streets of the capital Kuala Lumpur to condemn the decision, arguing it was unnecessary as Malaysia is a net exporter of oil.

Abdullah is expected to call national elections early next year, meaning that any further price hikes are likely to be announced soon to distance the move from the polls as much as possible.