However, analysts warned the move was politically risky for Prime Minister Najib Razak, who has struggled to shore up support for his National Front coalition ahead of general elections due by 2013.

In a statement late Thursday, Najib's office said cutting subsidies was part of "difficult but long-needed economic reforms" to shrink its fiscal deficit and help Malaysia become a developed nation, without overburdening the people.

It said subsidies had become ineffective and a barrier to Malaysia's progress as it benefited foreigners, the rich and big businesses rather than the poor, as well as encouraged smuggling to neighboring countries where prices are higher.

"Moving forward, additional, gradual and reasonable changes will be made to our subsidy regime to ensure that Malaysia is able to meet its development goals," it said.

"These measures are a demonstration of our fiscal responsibility. They will enhance Malaysia's financial stability, while also protecting (people)," it added.

Fuel prices rose by about 3 percent Friday, with a liter of petrol costing 1.85 ringgit (57 cents) and diesel 1.75 ringgit (55 cents). Liquefied petroleum gas was up 6 percent to 1.85 ringgit (57 cents) per kilogram. Sugar rose 15 percent to 1.90 ringgit (59 cents) a kilogram. Higher grade petrol will no longer be subsidized.

Even after the cuts, Najib's office said the government will still spend an estimated 7.82 billion ringgit ($2.44 billion) on fuel and sugar subsidies this year, and prices in Malaysia will still be among the lowest in the region.