But they said the businessman, BSA Tahir, was free to come and go.
"He's a free man," said an intelligence source who declined to be identified. But he said Tahir - head of Dubai-based Gulf Technical Industries (GTI) - was being investigated by Malaysian authorities.
"So far it doesn't warrant any arrest unless you have concrete evidence of breach of law," the source said.
Prime Minister Abd Allah Ahmad Badawi, whose son Kamal al-Din Abd Allah is linked to a local firm that supplied centrifuge parts to GTI, bridled after US President George Bush suggested a Malaysian link to the nuclear secrets-for-sale scandal.
Bush said Tahir was in Malaysia and described him as a deputy to Abd al-Qadir Khan, the father of Pakistan's atomic programme who confessed early this month to leaking nuclear secrets to Iran, Libya and North Korea.
"I don't know where he got the evidence," Abd Allah said on Thursday in reference to Bush's comments.
"So far it doesn't warrant any arrest unless you have concrete evidence of breach of law"
"We are not in any way involved, not at all," he told reporters in the southern state of Johor.
Whether Washington would push for action against Tahir remains unclear, a question US officials in Kuala Lumpur declined to answer on Friday.
However, one Western diplomat cited Malaysia's obligations under the nuclear Non-Proliferation Treaty, which it ratified in 1970.
"It's pretty clear that many people involved in this knew what was going on. The question is how far did it go up?" said the diplomat.
The Malaysian manufacturer, a unit of Scomi Group Bhd, says the relevant parts are ordered for oil and gas work.
Police have already said they have found nothing to suggest any wrongdoing by the firm.