BRITAIN's attempts to build a vigorous trade relationship with Malaysia have backfired on John Major.
The prime minister is being forced to explain why he and his predecessor, Margaret Thatcher, broke official rules on an aid-arms trade linkage.
They apparently required Malaysia to buy 1.3 billion British pounds ($1.94 billion) worth of military equipment in order to secure a 200 million British pounds aid package to build a huge hydro-electric dam.
At the same time, London press coverage of the deal has prompted Mahathir bin Mohamad, the Malaysian prime minister, to ban all future trade with Britain.
Dr. Mahathir claims that the newspapers have falsely accused Malaysian government ministers of accepting bribes from British companies.
Malaysia is Britain's largest market in the Pacific Rim. British exports to the former British colony were worth 964 million British pounds in 1993. Most of the trade was with the Malaysian government.
At the time that Mahathir imposed the ban on Feb. 24, future contracts worth 2 billion British pounds were being negotiated in Kuala Lumpur, Malaysia's capital. If the ban remains, those contracts will be lost.
Britain had also been hoping to get the lion's share of a 3 billion British pounds contract to build a new civilian airport near Kuala Lumpur.
While Mr. Major battles to avert what British business leaders are calling a trading disaster, he and his foreign secretary are having to explain the terms of what has become known as the Pergau Dam deal.
At a House of Commons hearings earlier this year, senior civil servants said the government had approved the deal despite their advice that the dam was ``a very bad buy'' with serious environmental drawbacks.
The arms-for-aid controversy centering around the dam project, which is located near the border with Thailand, has hit the Major government while it is still answering questions about its policy of selling military equipment to Iraq in the run-up to the Gulf war.
Ahead of a meeting scheduled for March 2 with the House of Commons Foreign Affairs Committee, Douglas Hurd, the foreign secretary, admitted that arrangements for selling arms and lending money to Malaysia had become ``entangled.'' He conceded that this had been an error.
Major and Mr. Hurd have vigorously defended the government's involvement in the Pergau Dam project, arguing that it is vital for Britain to develop its trade with Malaysia and other rapidly developing countries.
The foreign secretary has claimed that if Malaysia enforces its trade ban, Germany, Japan, and other competing countries will fill the gap.
Since Mahathir came to power in 1981, he has had prickly relations with Britain. One of his first acts as prime minister was to order a ``Buy British Last'' policy when fees were imposed on foreign students studying at British universities.
Lady Thatcher, then prime minister, set out to improve relations with Malaysia. She traveled to Kuala Lumpur and persuaded Mahathir to rescind his ``Buy British Last'' order.
Arrangements for financing the Pergau Dam and Malaysia's purchase of British warplanes were made at a meeting between the two leaders in 1988. Major inherited the deal when he became prime minister.
Mahathir's latest attack on trade with Britain appears to have been triggered by London newspaper reports alleging that British companies bidding for building contracts had offered kickbacks to Malaysian government officials.
Last year, however, the Malaysian leader, who is a devout Muslim, criticized Britain for failing to respond to calls to help his co-religionists in Bosnia.
Major says he is determined to defend press freedom, but has said he regrets the press reports that enraged Mahathir.
Hurd has been coming under pressure to disclose official documents that British civil service sources say indicate a close aid-for-trade element in the Pergau deal. Letters from Thatcher to Mahathir are believed to be among the documents.
The opposition Labour Party is also demanding publication of the documents. Labour leader John Smith has accused the government of ``sleaze'' and claims that the government's eagerness to do arms deals with Malaysia was comparable with its readiness to sell military equipment to Iraq before President Saddam Hussein's invasion of Kuwait.
British government officials say thousands of British jobs stand to be lost if Major fails to persuade Malaysia to lift its trade ban.
On Feb. 26, London newspapers published full-page advertisements from British companies saying, ``We are proud to work in Malaysia.''