The Barisan Nasional government that has ruled Malaysia for 51 years slumped to its worst election result in March and in an August by-election, opposition leader Anwar Ibrahim was returned to parliament with a larger than expected majority.

'We have to win because we want to make the victory a starting point for BN (Barisan Nasional) and Umno's revival from the defeat in Permatang Pauh (Mr Anwar's seat),' Najib Razak, who will become prime minister in March, told a meeting in the rural constituency where the vote will take place on Jan 17.

On Saturday, Mr Najib, who is finance minister, handed over a RM408.6 million ($170.5 million) cheque for oil royalties to the state on the east coast of Malaysia where the by-election will be held, according to Malaysian news agency Bernama.

Mr Najib is set to take office after the departure of lacklustre Prime Minister Abdullah Ahmad Badawi was brought forward by Umno, the dominant party in the Barisan Nasional coalition.

The by-election is a key test for Mr Najib, who will lead the government campaign in a constituency that is almost 90 percent Malay, the race traditionally represented by Umno, compared with 60 per cent nationally in this country of 27 million people.

The opposition alliance will put up a candidate from an Islamic party that held the seat in 1999 and hopes to retake the marginal constituency which was won by the government with a majority of just 628 votes in the March general election.

It is taking place against a backdrop of a sharp deterioration in Malaysia's economy with growth set to drop to 3.5 per cent next year, according to government forecasts, and to zero according to some private sector forecasts.

While most political analysts believe Mr Najib will be a more formidable leader than Mr Abdullah, he will have little time to prove himself.

He has held a series of top cabinet posts and is currently finance minister, where he has been criticised by influential former prime minister Mahathir Mohamad for not doing enough to fend off the economic downturn.

At the same time as managing the economy, he must rebuild the multi-ethnic ruling coalition in the face of heavy criticism of Umno from its some of its partners.

'That is Najib's big challenge. He has to win popular support as quickly as possible because he is faced with a disillusioned and impatient electorate,' political analyst Ooi Kee Beng, a fellow at the Institute of Southeast Asian studies in Singapore wrote last week.

'His allies are insecure, at his heels snaps an opposition led by a wounded but nevertheless formidable leader in Anwar Ibrahim,' Mr Ooi wrote on the influential Malaysian Insider website (www.malaysianinsider.com). -- REUTERS