The government is worried Malaysia may slip into recession
Malaysia has banned the hiring of new foreign workers in factories, shops and other services.
The government said the move was to protect its citizens from unemployment during the economic downturn.
It has also told employers that if they want to cut back their workforce they must sack foreign staff first.
Malaysia is a leading Asian importer of labour, with more than two million foreign workers - mostly from Indonesia and other South East Asian countries.
The ban on new foreign workers is indefinite and will affect key manufacturing and services sectors which currently employ about half of Malaysia's foreign workforce.
Exemptions may be given to those working in highly skilled service industries and factories.
The decision was announced late on Wednesday by the Home Minister Syed Hamid Albar.
Syed Hamid told the New Straits Times that the decision had been prompted by a human resources ministry report which showed 45,000 people would be laid off by the end of the month.
"This is not the time for employers to ask for foreign workers," he told the newspaper.
"The first to be retrenched should be foreigners and not locals," he added.
Employers have been told that foreigners already working in Malaysia will be allowed to remain until their contract expires or until they are laid off.
Eka Suripto, an official at the Indonesian Embassy in Kuala Lumpur, said up to one-third of its 300,000 nationals working in Malaysia's manufacturing industry could lose their jobs this year.
"Certainly what they will sacrifice first are the foreign migrants," he said.
Thirteen thousand workers lost their jobs in the last quarter - over 75% were Malaysian.
In a further sign that Malaysia's export dependent economy is being squeezed by the global economic downturn, some economists are projecting the country's growth rate could fall to below 2%.