These included guarantees that Malaysia would keep supplying water to the island city-state after 2061, which had been in doubt.

Singapore had asked for a guarantee of 2.85 billion litres a day beyond 2061. Malaysia agreed to less than half that, 1.33 billion litres, and the fees will rise 15-fold.

Dr Mahathir said Malaysia would never cut off Singapore's water supply but that the fee would be reviewed every five years after 2061.

''We have assured water supply after 2061,'' Mr Lee said. ''This is a trade-off for long-term security.''

Singapore agreed to Malaysia's proposal that the road causeway linking the countries would be demolished and replaced with a bridge and undersea tunnel after 2007.

They also resolved disputes over the use of Malaysian-owned railway land in Singapore, requests by the Singaporean air force to use Malaysian air space and withdrawals from Singapore's central provident fund by peninsular Malaysians working in Singapore.

Mr Lee said officials from both nations would meet to fill in the blanks of an agreement for Dr Mahathir and Singapore Prime Minister Goh Chok Tong to finalise and sign. No deadline was given, but Dr Mahathir said he would like it to be as soon as possible.

''It's been a tough deal, because Dr Mahathir is not somebody you can take for granted, and he has driven me back as far as I can go,'' Mr Lee said.

''I also have been driven back as far as I can go,'' Dr Mahathir replied. ''But you have a lot more space,'' Mr Lee joked.

Malaysia's Deputy Prime Minister Abdullah Ahmad Badawi had earlier said Malaysia and Singapore shared ''an inextricable relationship'', especially since both countries, which rank among Southeast Asia's wealthiest, often compete with each other for foreign investment. But he said they would remain friends.

Malaysia and Singapore both face downturns due to the US economic slowdown. While Singapore slipped into recession in July, Malaysia has so far avoided the same fate, announcing last month that its economy managed one per cent growth in the second quarter of 2001.

Mr Lee visited Malaysia last year in what was seen as a crucial step to settle outstanding disputes. He is on a four-day visit with senior cabinet ministers and returns home September 5.