Asked about the main challenges facing the small island-state, Lee said: "First, very serious instability in the region which may cause great disturbance and affect our economy and our own stability.

"It has not happened yet and let's hope it will not happen but I would put that as one of the great problems," he said in an interview published on the website of the ruling People's Action Party (www.pap.org.sg).

He cited the dramatic political developments in neighbouring Indonesia, where President Megawati Sukarnoputri was swept to power last month after the sacking by parliament of Abdurrahman Wahid, as well as recent events in Malaysia.

"You can see that the Indonesian situation is very fluid. It will take some time to settle down to become stable and to grow again. So we will have a very difficult external environment," Lee said.

In Malaysia, he said the Parti Islam SeMalaysia (PAS) has been gaining support "at the expense" of the ruling United Malays National Organisation (UMNO).

"If it continues in that way and they can win over some of the Malay and Indian parties, that will present another difficult problem for the region," he said.

"Therefore, we must prepare for all these contingencies and try our best to meet them if they should happen. If it happens, we must be ready to be able to overcome the slowdown to the region that would take place," he said.

Lee said that internally, Singapore must "make an extra effort to have a solid base that will enable the government to make firm decisive moves."

Singapore must adjust the city-state's work force to be able to meet the demands of the globalised economy.

It must also reach out beyond the region and widen trade ties with countries like the United States, Japan, Australia and New Zealand.

Singapore has been criticised by some of its neighbours for negotiating a string of free trade agreements (FTA) with several countries. Last year, it sealed an FTA with New Zealand and is negotiating similar pacts with Australia, Japan and the United States.

Lee, Singapore's founding father and its former prime minister, called on younger Singaporeans to establish their roots at home rather than using their talents abroad.

"The biggest problem we face will be the attractiveness of taking jobs elsewhere, in America, in Europe, and other parts of the world. Our students go there, they study, they do well and are offered jobs," he said.

If they returned to Singapore after getting experience that would be fine.

But "if they forget their families and friends and relatives, take all the knowledge and training which Singapore has given them and service another economy, I think we will be the losers," he said.