Prime Minister Goh Chok Tong believes Singapore should cut its dependence on Malaysian water, a constant source of tension, to improve bilateral relations.
"It is high time we explore a different approach to water supply from Malaysia," Goh told Singapore's parliament.
"I do not want our relations with Malaysia to be always strained by this issue. It is not healthy for our two countries to be always locked in dispute," he added.
He said Singapore had already called a tender for a desalination plant and had been operating a plant to produce reclaimed water using membrane technology for two years now.
"The cost of these alternative sources of water is not all that prohibitive either," Goh said.
He said the key problem was the current price of three Malaysian cents (less than one U.S. cent) that Singapore was paying Johor, Malaysia, for every thousand gallons of raw water under agreements in 1961 and 1962.
Goh said comments in Malaysian media seemed to suggest that Malaysia should unilaterally amend the terms of existing water agreements. "But it is not so simple," he said.
Goh said both sides could walk away from the negotiations on a new agreement on water if an agreement could not be reached, but both sides had to honour existing 1961 and 1962 agreements.
"These two agreements were confirmed and guaranteed by both governments in the 1965 Separation Agreement, also known as the Independence of Singapore Agreement," Goh said
"Any breach of the Water Agreements would also call into question the Separation Agreement, and undermine our very existence. This is totally unacceptable," he added.
Singapore had offered to raise the price as part of a bilateral package deal, offering to pay 45 Malaysian cents when a supply agreement runs out in 2011 and 60 cents after 2061, with adjustments every five years.
Goh said the sensitivity of the water issue dated back to Singapore's separation from Malaysia. He quoted Malaysia's prime minister Tunku Abdul Rahman in 1965 as saying: "If Singapore's foreign policy is prejudicial to Malaysia's interests, we could always bring pressure to bear on them by threatening to turn off the water in Johor."
"Time has not changed this perception that water is to be used as leverage against Singapore," he added.
Other unresolved issues between the two often testy neighbours include a new water-supply agreement, the location of customs, immigration and quarantine facilities, the redevelopment of Malaysian railway land, the use of Malaysian airspace by Singapore's air force and the release of pension fund money belonging to some Malaysians who worked in the city state.
Goh said Malaysia had written to Singapore with its latest proposal on the bilateral package.
"We shall send them our reply some time next week," he said, without giving details of the message.