But he did not deny it, leaving Malaysian concerns about the reported deal up in the air on the eve of his first visit to Malaysia since 1990, when he was still prime minister.

He said Singapore could "get nearly all the information by paying the French or Americans, except not in such fine detail".

Mr Lee said he was making the trip to Malaysia to get a "sense of the changes" and, if he could, "facilitate a resolution" of the problems affecting relations between the two countries.

These included the sale of Malaysian water to Singapore, the disposal of railway land held by Kuala Lumpur in the heart of the island republic and the location of border checkpoints.

Singapore's defence spending has long been a cause for critical comment among Malaysians, prompting suggestions in the media that Malaysia was a potential target of its neighbours.

A New Straits Times headline over a letter raising concerns about the Singapore-Israeli joint venture, which was reported in Jane's Defence Weekly, described the planned spy satellite as a "new threat to security".

In an interview with senior editors of the New Straits Times group, which publishes the New Straits Times and Berita Harian, Mr Lee replied "yes" when it was put to him that Singapore "spends a lot of money on defence".

Mr Lee was asked: "Who are you afraid of? Who are your enemies?"

He replied: "If we name our enemies, we will make enemies." Singapore did not want to go to war with anybody but it "must be able to inflict a very high price", he added.

Mr Lee, who attracted criticism in Jakarta when he questioned the choice of Bacharuddhin Habibie to succeed president Suharto, offered a controversial comment on events in Indonesia.

He said he was "very sad" over the corruption charge against Suharto.

"Indonesia had to rehabilitate Sukarno [the first president]," he said. "Suharto never humiliated Sukarno. How could he humiliate Sukarno, who has done so much for Indonesia? I feel sad for Suharto. What his children did, that's different."

During his visit to Malaysia, which begins today, Mr Lee will meet the Prime Minister, Dr Mahathir Mohamad, and other officials.

Mr Lee and Dr Mahathir have both been described as authoritarian leaders and both are critics of Western democracy but they have opposing views on a range of international and regional issues.

They were fierce political foes during the time of Singapore's forced withdrawal from the Federation of Malaysia in 1965 and the relationship does not appear to have strengthened greatly in the intervening years.

But both seem to recognise the need for Singapore and Malaysia to work together for their mutual benefit despite the serious points of dispute between the two governments.