But the government says it cannot afford to fund the subsidies any longer.
Global market rates
Abdullah Ahmad Badawi, Malaysia's prime minister, was expected to announce details of the reforms on Wednesday in a move that could double Asia's second-cheapest pump prices.
The government has said it plans to start using global market rates for fuel in August to prevent subsidies from eating up a third of its budget.
"These proposals will see inflation go up by one per cent and reduce the gross domestic product by 0.5 per cent"
Pro-government New Straits Times newspaper
"These proposals will see inflation go up by one per cent and reduce the gross domestic product by 0.5 per cent," reported the pro-government New Straits Times
newspaper on its web site without identifying the source of the information.
Apart from pushing up inflation, already at 15-month high, a fuel price hike could stoke public anger against Abdullah at a time when he is trying to arrest a slide in public support for the government and fend off a challenge to his leadership.
A cabinet committee on inflation has proposed measures including allowing dominant power distributor, Tenaga Nasional Bhd (Tena KL), to raise electricity tariffs in all of Malaysia except the provinces on the island of Borneo.
Other proposals include imposing additional taxes on independent power producers and palm oil millers and a gradual cut in gas subsidy to the power industrial sector.
In Asia only Myanmar has slightly lower pump prices than Malaysia, although sales in Myanmar are rationed to two gallons per car a day.
Based on the latest floating market prices in Singapore, the Asian oil trading hub, Malaysian prices would have to rise 69 per cent to 86 US cents a litre of petrol and 157 per cent to $1.08 for diesel.