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By Niluksi Koswanage
KUALA LUMPUR, March 3 (Reuters) - Gunmen have killed five policemen in Malaysia's Sabah state where members of an armed faction from the Philippines are staking an ancient claim to the remote corner of Borneo island and have been facing off with security forces.
The violence could reignite tension between the Philippines and Malaysia, threaten growing economic interests in the resource-rich region and even lead to a delay in a Malaysian general election.
The shootings late on Saturday followed the killings on Friday of two policemen and 12 members of the faction, who are followers of the sultan of Sulu, a south Philippine region, who occupied a Sabah village in February to press their claim.
The killing of the five policemen in an ambush about 150 km (93 miles) away from the main standoff, adds to fears that insecurity is spreading in a region that has been of increasing interest to investors.
Malaysia's inspector general of police, Ismail Omar, tried to ease any worries on Sunday, saying things were under control.
"I don't want speculation that Sabah is in crisis," Ismail told a news conference in the town of Lahad Datu. "We have our security forces at three places to respond."
Sabah is a crucial state in a general election that Malaysian Prime Minister Najib Razak must call by the end of April and which could be the closest in the country's history.
If security in Sabah worsens, he could be forced to delay the election and he would be vulnerable to criticism over the government's handling of the problem. Najib has promised "drastic action" if the group does not leave.
The confrontation had threatened to damage ties between the Philippines and Malaysia. The neighbours have periodically been at odds over security and migration problems along their sea border.
A surge in recent decades of Philippine immigrants to Sabah, many of whom work in palm oil plantations, has sparked resentment and promised to be a hot election issue even before the Sulu sultanate supporters arrived.
Investors will also be concerned about the bloodshed.
Oil majors like ConocoPhillips and Shell have poured in large sums to develop oil and gas fields in Sabah. Chinese companies have been investing in hydro-power and coal mining.
Ismail said two gunmen had been killed in Saturday's encounter, while three had been arrested near Lahad Datu. Two army battalions had been sent and were on standby, he said.
He declined to comment on a report in Philippine media quoting the sultan's family in Manila as saying Filipinos in Sabah were holding four security officials hostage.
Sabah is a stronghold of the ruling National Front coalition but the opposition has started to make inroads, partly on concern over immigration. The government has been accused of handing out citizenship rights to thousands of immigrants in exchange for votes since the 1990s.
For generations Borneo, one of the world's biggest islands, was a forbidding expanse of jungle, thinly populated by head-hunting tribesmen, and claimed by Muslim sultans and later European colonialists based in coastal trading towns.
Colonial Britain and the Netherlands carved up the island in the nineteenth century and Malaysia and Indonesia took their shares upon independence. Britain agreed to independence for the tiny oil-rich sultanate of Brunei on Borneo's west coast.
But under a pre-colonial pact between sultans, Sulu, in the Philippines, was awarded control of the northern corner of Borneo, in what would later become Malaysia.
A British trading company agreed during colonial times to pay Sulu a nominal lease for Sabah - it now amounts to 5,300 ringgit ($1,700) a year - and the claim of the ancient Sulu sultanate on Sabah was all but forgotten, until February.
Then, about 150 followers of the Sulu sultanate, which has no power but commands respect in the southern Philippines, sailed in and occupied a Sabah village, staking their claim and demanding a renegotiation of Sabah's lease.
Malaysia has said the demands will not be met. Both Malaysia and the Philippines have called on the gunmen to go home.
The trouble looks to be at least partly the result of efforts to forge peace in the southern Philippines, in particular a peace deal signed between the Philippine government and Muslim rebels last October to end a 40-year conflict.
Jamalul Kiram, a former sultan of Sulu and brother of the man Philippine provincial authorities regard as sultan, said the peace deal had handed control of much of Sulu to Moro Islamic Liberation Front rebels, ignoring the sultanate.
The sultan loyalists had gone to Malaysia to revive their claim to Sabah as a protest in response to what they saw as the unfair peace deal, he said. (Reporting by Niluksi Koswanage in KUALA LUMPUR; Additional reporting by Manuel Mogato in MANILA; Editing by Stuart Grudgings and Robert Birsel)