With new leaders installed in both Malaysia and Singapore, once-frosty relations between the neighbors are warming. This détente has potential benefits for the region's economy and security.

Singapore and Malaysia are two of Southeast Asia's most successful economies, with trade between them amounting to about half the region's total.

But a series of spats during the past decade, ranging from disagreement over the price of water to differences on airspace, have kept the two countries from fulfilling their economic potential.

New leaders in both countries are now mending fences.

In Malaysia, combative former Prime Minister Mahathir Mohamad has been replaced with a more conciliatory leader, Abdullah Ahmad Badawi. In Singapore, the new prime minister is Lee Hsien Loong, the son of Singapore's founder Lee Kwan Yew.

Kuala Lumpur political analyst Karim Raslan says the new leadership has led to a rapprochement.

"I think the transition is very important because once you have a new set of leaders, it is easier then to turn a fresh page, reassess the situation and move forward," said Karim Raslan.

Ties between the two have been periodically strained since the early 1960s, when Singapore joined and then quit the Malaysian federation.

The presence of Malaysia's 72-year-old railway station in the heart of Singapore's business district has been a source of irritation for the small city-state for decades, while Singapore has balked at the price it pays Malaysia for its drinking water.

Singapore's founder Lee Kuan Yew enraged Mr. Mahathir in 1997 with comments that the southern Malaysian city of Johor Bahru was notorious for shootings, muggings, and carjacking.

Other disputes have centered on military airspace and territorial rights over islands in coastal waters.

But recent events show that relations are warming. Earlier this month, Lee Hsien Loong visited Malaysia and he has appointed a former prime minister, the mild-mannered Goh Chok Tong, as Singapore's point man for discussions with Malaysian officials.

Analysts say tighter diplomatic links could take already strong security cooperation even farther. Malaysia and Singapore have both aggressively pursued militant Islamic groups as part of the U.S.-led war on terror.

But Karim Raslan says it was the commercial ties that paved the way for diplomatic fence building.

"Economics are moving faster than politics, and in a way the politicians are now catching up," he said.

For example, Malaysia International Shipping Corporation, the world's biggest carrier of liquefied natural gas, bought American Eagle Tankers from Singapore's national shipping company Neptune Orient Lines for more than $1 billion last year.

Malaysia has opened its doors for the investment arm of Singapore's government, Temasek, to buy a five-percent stake in Telekom Malaysia, the country's biggest fixed-line utility.

Airline operators could also be big beneficiaries, as the governments open up commercial airspace to a slew of new budget carriers.