Mahathir said Malaysia may have to pay about 500 million ringgit ($US125.63 million) to Singapore to get out of the deal.

"We had agreed to proceed with the high speed rail project based on mutual benefits and obligations," Singapore's Ministry of Trade said in a statement. "We will wait for official communication from Malaysia."

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Companies from China, Japan, South Korea and Europe were eyeing a contract to build, operate and finance the trains and the rail assets.

Even picking a winner was expected to test ties between Malaysia and Singapore, which have had frosty relations since the end of the colonial era in the 1960s. The project was also set against the backdrop of broader tension over China's growing influence in the region.

About 90 per cent of the rail network was set to be in Malaysia, including a terminal in Bandar Malaysia, a big property development owned by scandal-hit state fund 1Malaysia Development Berhad (1MDB).

A $US1.7 billion deal to sell a majority stake in Bandar Malaysia to a Malaysian-Chinese consortium fell through in May 2017. A year on, the project has failed to attract any buyers.

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Mahathir has reopened an investigation into 1MDB following his election victory. It is being investigated in other countries, including the United States.

Properties linked to former prime minister Najib Razak have been searched as part of the investigation, and Najib has given statements to an anti-graft agency.

Najib has long denied any wrongdoing.

Mahathir said his government was also in the process of renegotiating with Chinese partners over the terms of a multi-billion dollar rail deal aimed at connecting the South China Sea at the Thai border in the east with the strategic shipping routes of the Straits of Malacca in the west.

He estimated that Malaysia could cut almost a fifth of its national debt and liabilities by scrapping such big projects.

Reuters