The remarks before a group of Asian and European editors underscored the balancing act that Singapore is seeking to achieve as it weathers the fallout from the purchase by Temasek Holdings, the Singapore state investment company, of Shin Corp from Mr Thaksin's family.

A Thai court this week agreed to hear a petition to revoke the licences of Shin Corp, a telecoms and media group, because of allegations that Temasek breached a 49 per cent foreign shareholding ceiling for strategic industries. Thai police are also examining a report from the Thai commerce ministry on whether Temasek violated the ownership laws.

There are suggestions that Singapore may try to resolve the dispute soon by holding direct talks with the new government of Surayud Chulanont. Singapore was the first member of the Association of South-East Asian Nations to send a congratulatory letter on his appointment last weekend.

Mr Lee described the $3.8bn deal as "a professional decision and a proper one", explaining that Temasek, which is headed by his wife, Ho Ching, had to be "careful, but also take risks" in making overseas investments.

Temasek has embarked on an ambitious international acquisition programme since Ms Ho became its chief executive in 2002. Temasek could boast of a good performance record for its overseas investments with the exception of Shin Corp.

The disclosure that the Thaksin family did not have to pay taxes on the sale triggered a political crisis that has caused Shin Corp's share price to fall by more than 40 per cent since the deal was concluded.

Singapore did not bear any responsibility for the Thai political crisis triggered by the Shin Corp sale because Mr Thaksin was already facing anti-government demonstrations prior to the deal, Mr Lee said.

Temasek conducted a political risk assessment of the deal, but it would have been hard to predict the political impact the sale caused, said Mr Lee, noting that "it's easy to see the decision in 20/20 hindsight". Mr Lee defended the investment as showing confidence in Thailand's long-term future.

The Singapore leader cited the Thai coup as an example of the problems of applying western democratic ideas to Asia, explaining that Mr Thaksin was deposed in spite of winning two previous elections.

Western liberal democracy "is not a magic formula for success" in Asia because it "has not always delivered stable, legitimate and effective government".

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