KUALA LUMPUR - MALAYSIA is working on a plan to allow the creation of Islamic hedge funds, an official at the country's market regulator was quoted on Friday as saying.

'It is now in the developmental stage,' Mr Goh Ching Yin, an executive director at the Securities Commission, was quoted as saying by Business Times newspaper.

'There's no timeline, but we are making good progress.' He said the plan could get off the ground next year depending on market conditions.

Hedge funds' bets on falling share prices have been blamed for contributing to the near-collapse of investment bank Bear Stearns, the demise of Lehman Brothers and for a sharp drop in financial stocks in general.

They sit uneasily with some Islamic finance experts who say they amount to gambling, which is forbidden by the sharia. -- REUTERS