The by-laws of Merdeka Square, a palm-fringed cricket pitch in central Kuala Lumpur, are published on a notice board near the 95-metre flagpole erected to commemorate Malaysia's independence from Britain in 1957. It warns citizens not to "nail, tie, bind, chain, draw, scribble, paint, spray, mark, affix, inscribe, display, place or hang anything on any tree, plant or structure," to "spit, urinate or defecate," or to "hold any public address, demonstration, assembly, meeting, gathering or any other activity without a permit."

The wording, so useful now that Prime Minister Mahathir Mohamad wants to stop all protest meetings here, was almost certainly adopted straight from the old British by-laws, along with the bulk of the legislation in place in Malaysia when the colonial rulers departed. Indeed as the Union Jack came down on Independence Day 41 years ago, the first prime minister, Mr Tunku Abdul Rahman, praised the legacy left by the British and hoped it "would not suffer in efficiency and integrity in the days to come."

In terms of brutal efficiency, the Internal Security Act (ISA), used by the British against communist insurgents and a close cousin of the old Northern Ireland Special Powers Act, and adopted by Malaysia, has retained its repressive integrity. Under the ISA, a person can be held for 60 days in solitary confinement and then for periods of two years without trial.

It proved extremely convenient for Dr Mahathir in recent days when his deputy prime minister and finance minister, Anwar Ibrahim, threatened to become a runaway opposition force. The 72-year-old leader dismissed Mr Anwar on September 2nd after a power struggle between the two, who have come to represent the deep divisions in today's Malaysia.

After 17 years at the top, Dr Mahathir is widely credited with transforming the former colony from a tin and rubber-producing backwater into a modern Asian nation, symbolised by the twin Petronas towers in Kuala Lumpur, the world's highest buildings. He is credited with establishing Malay prestige in a civilised atmosphere, and presiding over an era of racial harmony among the country's 19.5 million Malay, Chinese and Indian inhabitants.

But his critics say he is also enmeshed in Malaysia Inc, a network of business, politics and government under which many millionaires were created by patronage and cronyism. Under his tutelage the regulatory bodies took a back seat and bad debts mushroomed.

Dr Mahathir is contemptuous of international opinion, has made crude remarks about a "Jewish agenda" in international finance and has closed Malaysia's currency and stock markets as protection against the region's financial crisis.

Mr Anwar, on the other hand, a complex man with ties to Islamic groups, has portrayed himself as a sophisticate, both in dress and in ideas, and is a symbol to admirers, who range from Chris Patten and Robert Rubin to President Joseph Estrada of the Philippines, of openness and democratic government. His supporters say the rift with Dr Mahathir developed over the 51-year-old deputy's opposition to the "restructuring" of some ailing Malaysian companies on the grounds that they were in fact rescue operations for top business people.

Many months ago Dr Mahathir began eroding Mr Anwar's base, replacing officials and editors with whom the deputy prime minister was associated. Mr Anwar complained to friends. "Everything I do is blocked," a highly-placed source reported him saying.

The beginning of the end came at the annual conference in June of the United Malays National Organisation (UMNO), the governing party to which both belonged. Two days before the conference, Dr Mahathir, notorious for his short fuse, exploded in private at rumours that Mr Anwar was going to expose high-level corruption in a speech to UMNO Youth. Mr Anwar, in fact, backed away from confrontation at the last minute and his speech was relatively mild.

"Anwar grovelled to Mahathir," said a disappointed aide. "Those who wanted to support him openly backed down also, and those wavering said `thank God we didn't show our hand'."

Dr Mahathir apparently believed that Anwar, inspired by the ousting of Indonesia's President Suharto, was still plotting to take the top job. It was at this point that Malaysian politics plunged into sleaze which makes the Monica Lewinsky story seem like genteel gossip.

At the UMNO conference a book was circulated by Dr Mahathir's supporters called 50 Reasons Why Anwar Cannot Become Prime Minister. It included detailed charges that Mr Anwar had engaged in acts of sodomy with different partners. Anwar obtained an injunction and complained to the police, who, suspiciously, treated the allegations in the book as prima facie evidence against Mr Anwar, and prepared charges of sex crimes against him.

These were conveniently publicised on the very day Dr Mahathir sacked his deputy, citing deep policy differences. The affidavit alleged he had had sex with Malaysian and foreign women and had sodomised one man 15 times, and that after one sexual encounter he had sneaked off wearing a wig. Anwar immediately claimed he was the victim of a political conspiracy.

Out of government, he found his nerve and began to attack Mahathir at rallies of his supporters. Four Islamic groups launched a movement, soon joined by opposition parties and human rights groups, for "reformasi", the catchcry for reform used by the Indonesian students who toppled Indonesia's President Suharto.

The Malay-only UMNO party has long been taken as the natural party of government in Malaysia (it is the dominant party in the ruling coalition, called Basrian National, which includes Indian and Chinese groups). The fragmented opposition began to coalesce for the first time into a viable political alternative, bringing together an opposition Chinese party and a small Islamic party.

"Reformasi could be a bridge for us and we could be seeing a fundamental change in the dominance of the ruling party," said an Anwar supporter. With the biggest crowds since independence rallying in support of Anwar, the move to discredit and diminish him intensified. His adopted brother and a former speech writer were arrested and given six-month sentences for being sodomised by Anwar.

Dr Mahathir called a press conference to hammer home the message that a deviate could not serve in government. "Do I go around town and tell the world that this is what my deputy was doing?" he said, before proceeding to do just that. He said he had disbelieved the charges of homosexuality at first but had become convinced after talking to the two men in prison. He then told journalists in crude detail what Anwar and his friends had allegedly done. "They not only performed sodomy but during the process he was - I don't know how you call it - he was masturbating this man," he said in one of the more printable comments.

Eventually, on September 20th, after Anwar told a crowd of thousands that Mahathir must quit, a special police unit wearing black balaclavas and armed with sub-machineguns raided his home and took Anwar into custody under the ISA. Anwar had anticipated the move and had given an interview to CNBC, the US business network which is popular in Asia, excoriating his former mentor for corruption.

In the tape, Mr Anwar said sexual misconduct and other allegations against him were part of a conspiracy to stop him exposing cronyism and corruption. Dr Mahathir "wants to use the remaining time he has to strengthen the interests of his family, his cronies," he said, alleging that the prime minister had intervened in a bail-out by the government-owned oil company, Petronas, of the transport business of his son, Mirzan; and that a sum worth more than $500 million (£340 million) had been siphoned off from UMNO party funds and about one billion (£680 million) deposited in a Swiss bank account.

Off camera, Mr Anwar alleged that a Malaysian Air pilot had reported that one of Mahathir's associates had taken three firstclass seats on a flight to Switzerland and used them for himself and two suitcases. When cabin staff complained he said they contained cash and refused to stow them in the overhead locker.

Mr Anwar told Dr Mahathir, who reportedly said: "I'll take care of it", but nothing happened. Last week Dr Mahathir called his new foe the "biggest liar" and asked scornfully: "If you were to bring a bagload of money to Switzerland do you carry it and put it on your seat?"

The sensational interview was videotaped and circulated widely in Malaysia, where the media is slavishly pro-Mahathir. With Anwar locked up, police moved to muzzle his fiercely loyal wife, Wan Azizah, a 45-year-old ophthalmologist trained in Dublin. The mother of six was issued with a restriction order under the ISA barring her from holding rallies at her house, and is now hemmed in by a security apparatus like that around Aung San Suu Kyi in military-controlled Mayanmar (Burma).

Enormously popular and a big hit with the international press, Wan Azizah declared her intention to lead the reformasi movement, saying: "My dignity, like Mrs Gandhi said, is to follow my husband. Somebody has to carry on the fight."

According to an analyst with high government connections, she has "the potential to emerge as the Cory Aquino of Malaysia, though in the case of the Philippines, the whole population united against Marcos, whereas in Malaysia it is only the `usual suspects'." He explained students or workers had not demonstrated in large numbers "because it is the strong middle class which is very angry, and they have too much at stake in society and they are not willing to cross that line and go to the streets."

The fact that people are not hungry also distinguishes the crisis in Malaysia from that in Indonesia, where infuriated mobs with nothing to lose were uncontrollably destructive. "What we are seeing is the use of coercion against an idea," said a leading academic (who did not want his name published) in his office near the Petronas Towers. "I'm deeply ashamed of what is happening. It's like Stalinism, but this is the 1990s, not the 1950s. Mahathir is introducing xenophobia to Malaysia, and even ordinary people can see through that."

Insiders say that, incredibly, there is no sense of crisis among the people around Mahathir, who now holds the finance and home affairs portfolio, giving him full control of economic policy and the police. "The problem is Mahathir is illiterate - he can't read the writing on the wall," said the academic.

With foreign investors frightened at the instability, Mr Mahathir has, however, decided to name another deputy next month instead of waiting a year as he announced earlier. Supporters of Education Minister Najib Tun Razak and Foreign Minister Abdullah Badawi, both regarded as moderates, have already begun lobbying for the post, and possible future leadership of Malaysia.

Dr Mahathir is 72 and has had a by-pass operation, and, in his own words this week, could drop dead at any time. He will be strengthened if the capital controls he put in place to protect Malaysia from the Asian financial maelstrom, and the money he is pumping into the economy, work well, but Mr Anwar's supporters argue that it will in fact delay Malaysia's recovery, while countries like Thailand bounce back.

The appearance in court this week of a battered Anwar and the collapse of much of the case against him - the two men in jail for sodomy have recanted, though one has decided not to appeal for fear of a longer sentence - has severely dented Dr Mahathir's image abroad.

In an angry outburst, the tetchy prime minister accused foreign reporters of portraying Malaysia as a country unfit to govern itself. "You are hoping to see the police act violently so that you can say that these natives don't know how to run their country and you should hand it back to the colonial masters so that they can run the country better," he told a press conference.

As the crisis deepens, Dr Mahathir continues to run Malaysia, but only with the help of the colonial legislation he inherited from the colonial masters he so disdains.