The Southeast Asian state has been rattled by the discovery of alleged ties with Osama bin Laden's al Qaeda network. Among them:
Two of the suicide hijackers visited in the year 2000, and met with members of a militant Malay Muslim group called Kumpulan Mujahideen Malaysia, or KMM.
The roommate of a third hijacker, at least one of the suspects in the USS Cole bombing and Zacarias Moussaoui, the so-called 20th hijacker now in custody in Virginia, also allegedly made several visits to Malaysia.
Earlier this year, Singapore authorities arrested 13 men, accusing them of plotting to blow up a U.S. military bus and a central commuter rail station. The men were said to be members of Jamaah Islamiyah, or the Islamic Group, a terrorist organization that held meetings and stored chemicals for making the explosives in Malaysia.
In December, a Malaysian judge sentenced three Muslim extremists to hang and 16 others to life in prison for waging an armed revolt to overthrow the government and replace it with an Islamic state.
The State Department warns that Malaysia's state of Sabah is a frequent target of kidnappers from, or affiliated with, the Philippines' own Islamic fundamentalist group, the Abu Sayyaf.
Since last September, some 50 Malaysians have been arrested for suspected ties with Islamic exremists.
Some U.S. officials have called the country a haven for Muslim extremists because it offers visa-free entry for people from almost all Islamic countries.
Kuala Lumpur has formally objected to such characterizations with indignation, but in private some Malaysian government officials acknowledge radical Islamic groups regularly meet with their al Qaeda backers there.
To understand Malaysia's future with extremist Islam, one puzzle that must be solved is its famous prime minister, Mahathir Mohammad — who has spent the past two decades clinging on to power, building a reputation Machiavelli would be proud of.
Throughout his career, Mahathir has bred an anti-colonial, sometimes anti-Washington stance to unite his country's diverse population, said Douglas Borer, a political science professor at Virginia Tech.
He has supported the execution of drug smugglers and oversaw the deaths of several Western citizens.
At the height of the Asian financial crisis in 1997 he attacked Jews for undermining Malaysia's economy, accusing the financier George Soros, who is Jewish, of economic sabotage.
And he has condemned the New York Times and The Wall Street Journal as "Zionist." In 1993 he prohibited Steven Spielberg's holocaust film, Schindler's List, from being shown because of its alleged pro-lsraeli bias.
Mahathir has even expressed unwillingness to comply with an extradition treaty that would allow many of those suspected of links with al Qaeda to be tried in the United States.
Last month, he told national news agency Berama, "if there is not enough proof, we will not surrender the suspect to the U.S."
Osman Bakar, the Malaysia chair at Georgetown University, speculated Mahathir's reluctance may be more evidence of the prime minister's political mind at work.
"For him to arrest a number of people may also associate him with opportunity. He knows what kind of price he has to pay," he said.
"There would be the perception that he's acting on orders of the United States."
At the same time, though, Mahathir has helped build one of the most advanced countries in Southeast Asia, a socially and economically progressive stand-out in the Muslim world.
Women often go without head-coverings, and some even dress in Western clothes, and in the more urban areas of the country, alcohol is served. Kuala Lumpur even hosts the tallest buildings in the world, the Petronas Towers.
"There's no question Mahathir's success is tied to the global economy," said Borer.
Ironically, but not unsurprisingly, Mahathir has also built a reputation of taking strong stances against Islamic extremism.
In fact, after Sept. 11, Mahathir's popularity swung 180-degrees from an all-time-low this summer as Malaysians fretted about extremism, experts said.
And there's little doubt that Mahathir has been quick to take advantage of the war on terror. PAS, the main Muslim opposition party in Malaysia, has accused Mahathir of capitalizing on the situation by painting them as fanatics nearly equivalent to the Taliban.
Meanwhile, opposition parties note that he has had a much more free hand in exercising the notorious Internal Security Act, or ISA, which enables him to detain anyone he wants for up to two years without a trial.
The ISA used to be a major source of controversy with Washington, but since Sept. 11, criticism has all but disappeared. Bakar even said that Mahathir's liberal use of the ISA before Sept. 11 had helped his popularity, by giving the perception that he had made pre-emptive strikes.
The chances of the country swinging towards fundamentalism were in fact, quite small, experts said. "As far as fighting extremists, the majority agree," said Bakar.
Borer also noted that while the military was all Muslim, they all appeared to believers in the separation of church and state, and were therefore unlikely to be another source of revolution.
"Not as strong as the Turkish, however, most of the military are pretty well-traveled," he said.
In fact, he could only see two conditions under which Malaysia might actually switch sides.
One was an escalation in the Middle East. "My experience is the only thing that unifies Muslims in the world is the Palestinian issue," he said.
The other would be the end of the prosperity Malaysians have enjoyed for so long. "The chances of Islamic fundamentalism in Malaysia are only possible in the Malaysian economy collapses," he said.