March 10 (Bloomberg) -- Malaysian stocks fell the most in a decade after the ruling coalition's worst election result in fifty years raised doubt over Prime Minister Abdullah Ahmad Badawi and his public spending program.

The Kuala Lumpur Composite Index tumbled 9.5 percent as opposition parties took control of almost half the states contested in March 8 elections. The ringgit posted its biggest drop since June and bonds slumped the most in four months. The risk of Malaysia's government defaulting on debt rose to a record.

Malaysian Resources Corp. and UEM World Bhd. led a slide by construction stocks on concern the government's 200 billion- ringgit ($63 billion) spending plan may be held up. State banks including Bumiputra-Commerce Holdings Bhd. sank amid demands for Abdullah to quit.

``An element of leadership uncertainty is scaring investors as Malaysia has been perceived as politically stable for so long,'' said Jason Lee, who helps oversee $1.4 billion at JMF Asset Management in Kuala Lumpur. ``The risk is that projects will be delayed as there'll be more scrutiny from the opposition.''

The ruling National Front coalition, which has been in office since Malaysia gained independence in 1957, lost the power to change the constitution unopposed when it was denied a two- thirds majority for the first time since 1969. The coalition has won 140 of 222 parliamentary seats, while the opposition clinched 82, according to the latest data from the Election Commission. Abdullah said yesterday he won't resign because he has the support of his party's leaders, according to the state-owned Bernama news agency.

Stocks Tumble

The Kuala Lumpur Composite Index plunged 123.11, or 9.5 percent, to close at 1,173.22. All 100 of its members declined. Today's drop is the biggest since Sept. 8, 1998, when it plunged 21 percent amid the Asian financial crisis. The benchmark has decreased 23 percent from its Jan. 11 record high, signaling a bear market.

The exchange earlier imposed an hour-long trading halt after the benchmark dropped by 10 percent. That's the first time the exchange's circuit breaker has been used since its introduction in 2002, exchange spokeswoman Karina Bahrin said.

``The market fears the unknown of what changes need to be made given this election result,'' said Ivan Tham, who helps oversee $5 billion of Asian assets at City of London Investment in Singapore. ``The fear is that Badawi's mandate now is a lot less strong given the performance at the polls.''

The ringgit lost 1.2 percent to 3.1983, the most since June 8, according to data compiled by Bloomberg. Malaysia's benchmark 10-year bond yield climbed 11 basis points to 3.81 percent, according to central bank data, the most since Nov. 16.

Ethnic Divisions

Opposition parties claimed the government had failed to reduce corruption and poverty in Southeast Asia's third-largest economy. It also campaigned to end race rules that favor the nation's majority Malays but disadvantage its sizeable ethnic Chinese and Indian communities in housing, jobs and education.

Former Premier Mahathir Mohamad, Malaysia's longest-serving prime minister who handpicked Abdullah as his successor in 2003, yesterday renewed calls for him to quit because of the election result, saying the loss has eroded investor confidence.

Credit-default swaps on Malaysia's government bonds added 21 basis points to 115 basis points at 3:20 p.m. in Hong Kong, according to ICAP Plc prices. That means it costs $115,000 a year to protect $10 million of the country's debt from default for five years.

Federal projects previously were endorsed without sufficient review by state governments and ``this is not going to be the case with the new government,'' Chow Kon Yeow, chairman of the Democratic Action Party in Penang state, said in a phone interview.

Government Debt

Malaysian Resources plunged 34 percent to 1.27 ringgit, the second-biggest decline by percentage on the Composite Index. Malaysian Resources is developing a 1.6 billion ringgit monorail contract in Penang, which is one of the five states that the National Front, also known as Barisan Nasional, lost in the elections.

UEM lost 21 percent to 2.73 ringgit. The state-controlled company is building Southeast Asia's longest bridge on Malaysia's west coast linking Penang island to the Malaysian peninsula.

``We believe uncertainties on the implementation of some projects in opposition-held states'' will hurt stocks such as UEM and Malaysian Resources, Loong Chee Wei, an analyst at CLSA Asia- Pacific Markets wrote in a report today. Even Gamuda and MMC's rail project ``is at risk,'' he said.

Gamuda Bhd., the No. 1 builder, lost 17 percent to 2.94 ringgit while MMC Corp., its joint venture partner that's building the nation's largest rail contract, tumbled 17 percent to 2.90 ringgit.

`Uncharted Territory'

Scomi Group Bhd., an oil and gas services company controlled by Abdullah's son Kamaluddin Abdullah, declined 21 percent to 87 sen. State-owned Bumiputra-Commerce, Malaysia's second-biggest bank, tumbled 14 percent to 8.80 ringgit.

``We're entering uncharted territory,'' said Mushtaq Ibrahim, who manages about $1.4 billion at Amanah SSCM Asset Management Bhd. Foreign investors ``have been selling down the market in the last month over external factors, now they have this domestic issue that will cause them more worries,'' he said.

To contact the reporter on this story: Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net; Manirajan Ramasamy in Kuala Lumpur at rmanirajan@bloomberg.net

Last Updated: March 10, 2008 06:17 EDT