By Jonathan Kent
BBC correspondent in Kuala Lumpur
Kuala Lumpur has accused Indonesia of trying to wreck its timber industry, amid accusations that logs are being laundered through Malaysia.
Indonesia looses huge areas annually to logging
The Indonesian forestry minister has called on the European Union to ban imports of Malaysian wood products.
The row has broken out as Malaysia takes the chair of a United Nations conference on bio-diversity meeting in its capital Kuala Lumpur.
This is acutely embarrassing for Malaysia.
With hundreds of environmentalists and thousands of government delegates here to discuss protecting threatened habitats, the hosts stand accused of speeding the destruction of Indonesia's rainforests.
A report out last week charged Malaysia with turning a blind eye while millions of tonnes of wood from protected Indonesian forests are laundered through their country.
Illegal timber is stamped as Malaysian; therefore buyers are fooled into believing it is sustainably produced.
Lim Keng Yaik, the Malaysian minister responsible for timber, is furious.
He says the report by the group, the Environmental Investigation Agency, or EIA, is full of half-truths and tarnishes Malaysia's image.
The EIA estimates that Indonesia loses an area of forest the size of Taiwan to illegal logging every year.
Mr Lim is no less angry with the Indonesians, who are backing the report's claims and calling for a European Union boycott of Malaysian timber products.
He says the Indonesians have an ulterior motive to undermine Malaysian businesses.
The two countries are the world's top exporters of tropical timber.
The row has overshadowed an agreement signed on Friday by Malaysia, Indonesia and the Philippines to protect an area of ocean bordered by the three.