The opposition took power in Malaysia's industrial heartland on Tuesday and immediately said it will no longer follow the nation's controversial affirmative action policy in state administration.

"We will run the government administration free from the New Economic Policy that breeds cronyism, corruption and systemic inefficiency," said Lim Guan Eng, whose Democratic Action Party (DAP) won control of the state at the weekend's watershed general election.

Under the policy, majority ethnic Malays, whose politicians dominate the ruling national coalition, receive preference in terms of state contracts, jobs and financial assistance.

Penang is the only one of Malaysia's 13 states so far to openly spurn the "Bumiputra" (sons of the soil) affirmative action policy.

Lim also said he wants to use cash from state oil firm Petronas to fund a new $940 million bridge project, and would seek a meeting on that matter with Prime Minister Abdullah Ahmad Badawi.

In Kuala Lumpur, de facto opposition leader Anwar Ibrahim also took aim at the Bumiputra policy and said opposition-held states would review state government contracts if they are not awarded in a transparent fashion.

Describing the opposition programme as the Malaysian Economic Agenda (MEA), he said: "The MEA can be implemented at the state level to reduce race-based affirmative action policies, and begin to implement a more competitive, merit-based system.

"This will immediately increase foreign investment, improve the state tax revenue and begin to promote more equity and income parity."

Anwar's People's Justice party won 31 seats in the 222-member National Parliament, the most of any opposition party, and will share power in four of the five state governments that fell under opposition control.

The National Front coalition won the most seats, but lost the two-thirds majority it has enjoyed almost without interruption since independence in 1957, a stunning slap in the face to the prime minister, who had won 90 percent of the seats in 2004.

SOMBRE CIVIL SERVANTS

Lim's government, led by his DAP party backed mainly by ethnic Chinese, was sworn into office on Tuesday in Penang in a quiet ceremony witnessed by sombre-looking civil servants who have only ever worked for the long-ruling National Front.

The strongly Islamist Parti Islam se-Malaysia (PAS) will lead or share power in four states, including three - Kedah, Perak and Kelantan - that share borders with Thailand, which has been battling an Islamic insurgency with historical links to Malaysia.

PAS and the DAP have vowed to review federal projects on the drawing board in their areas, but said would not stand in the way of projects that were already approved and were beneficial to the people, and have warned they would not tolerate cronyism.

Malaysia's politics of patronage, whereby state contracts are given to businesses aligned with ruling-party interests, has nurtured a powerful political-business establishment whereby contracts are often awarded without open, competitive tenders.

The Edge Financial Daily said in an editorial on Tuesday that was a major factor in Saturday's election.

"Indeed, one can say that one reason why the people voted so strongly for the opposition in the elections is to send a message that they have had enough of political cronyism and awards of contracts and deals to politically connected companies," it said.

The prospect that this nexus could be cut, and the possibility of policy gridlock now that the National Front has lost its iron-clad two-thirds majority in parliament and faces strong opposition in heartland states, has spooked the markets.

Malaysian shares rose 2 percent on Tuesday after plunging 9.5 percent on Monday, wiping out some $30 billion in market capitalisation, probably the biggest single-day loss in the market's history. Analysts saw it as a short-lived rally.

Prime Minister Abdullah has a tricky task ahead in fending off leadership challenges, especially with his UMNO party - the dominant coalition partner - set to hold leadership elections in June. He will also need to fill gaping holes in his Cabinet - four ministers lost seats in the weekend election.

The winning opposition parties also face a delicate task. The Chinese-dominated DAP has long harboured deep suspicions about the Islamist agenda of PAS, which advocates Islamic law for Muslims, including punishments such as stoning and amputations.

In their first test, the DAP, PAS and People's Justice party were still hammering out power-sharing arrangements on Tuesday in Kedah, Perak and central Selangor state.

PAS kept power in Kelantan state and its government was due to be sworn-in on Tuesday evening.