The world's top palm oil producer would make a palm-oil based fuel mandatory at petrol pumps by 2008, a newspaper said, part of government efforts to cut its diesel subsidy bill.

High global crude oil prices are encouraging Malaysia to develop national use of a biofuel composed of 95% diesel and 5% palm oil.

The Government plans legislation next year to introduce the fuel and will give the public 12 months to get used to it before making it mandatory.

"We will enforce it and make everyone comply," said plantation industries and commodities minister Peter Chin in an interview with local publication the Malaysian Star.

"There will no longer be unadulterated diesel on sale.”

Malaysia is a net exporter of oil and gas and provides significant at the pump subsidies for petrol and diesel, spending an estimated 16 billion ringgit ($A5.54 billion) on subsidies in 2005, up 34% from 2004.

About 190,000 barrels per day of diesel oil are consumed and a 5% biofuel additive would cut about 10,000 barrels per day according to officials.

As biofuels become more important worldwide to help meet emissions targets and cope with spiralling oil prices, Malaysia hopes that diverting its palm oil industries to produce biofuel will allow them to become a competitive exporter in a global biofuels marketplace.