Goh also said that in meetings he had in November with Malaysian prime minister Mahathir Mohamad, both sides agreed to defer discussions of contentious issues such as the siting of the Malaysian rail customs, immigration and quarantine (CIQ) facilities in Singapore.

"The meetings between Dr Mahathir and I to discuss bilateral cooperation does represent a change in attitude on both sides towards restoring and improving bilateral ties," Goh told parliament.

"There is a greater chance now that such improvements will be sustained, especially if we conclude the loan and water agreement.

Relations between Singapore and Malaysia turned acrimonious early this year over a variety of issues and the two leaders had not met each other since April.

But in early November, Mahathir, facingsome of his biggest economic and political challenges since taking office in 1981, invited Goh to meet.

The two got together on November 5 and again on the sidelines of last week's Asia Pacific Economic Cooperation (Apec) summit, and developed the funds-for-water idea.

Goh said Malaysia had sent a draft loan agreement to Singapore on Friday and Singapore submitted a draft water agreement to Malaysia on November 14.

Goh declined to reveal any details of the agreements, saying officials are currently working out details.

"It can be a direct loan from the Singapore government, it can be Singapore government buying bonds from Malaysia, it can be a guarantee. These are what are being discussed at the moment," he said in reply to a Member of Parliament's query.

He said as these are major agreements they would be tabled to parliament for approval after both leaders had accepted the terms.

Goh said the proposals are a "win-win" solution for both countries as Malaysia will get funds cheaply and Singaporelong term water supply security.

"...Singapore will provide or raise funds for Malaysia on very favourable terms. These funds will help Malaysia meet its Financial requirements and overcome its economic challenge," he said.

Malaysian officials say the country's banking system alone needs about 40 billion ringgit ($10.5 billion) to get back on its feet.

"... With the water agreement, Singapore's long term supply of water will be secured. Water from Malaysia is also a cheaper alternative than desalination."

Singapore depends on water piped from southern Malaysia and has two treaties guaranteeing supplies, the last of which expires in 2061.

Goh said Singapore would go ahead with plans to build a major desalination plant even though it is in negotiation with Malaysia as Singapore needs to know how such plants work.

"I must caution that negotiation is still in progress and we cannot assume yet that we will reach agreement on the details," he said.