A row over the role of Malaysia’s state-controlled newspapers and television networks is throwing back the curtain on how racial scare-mongering is becoming an increasingly common political tool in a country that presents itself as a beacon for tolerance and diversity.

Last September, shortly after being elected president of Malaysia’s journalists’ union, veteran reporter Hata Wahari issued a statement urging the country’s newspapers to steer clear of publishing racially inflammatory articles.

Now Mr. Hata is on the brink of losing his job at one of Malaysia’s most influential newspapers, embarrassing Prime Minister Najib Razak and potentially setting back his efforts to modernize Malaysia’s resource-rich economy and unwind its race-based affirmative action policies.

Mr. Hata, 41 years old, says he thought his statement echoed Mr. Najib’s “1 Malaysia” campaign to create a level playing field for all Malaysians, whether they are from the country’s majority ethnic-Malay population or from its Chinese and Indian minorities.

“I asked the media to be less biased and be fair in its reporting to all parties,” Mr. Hata said. “A few months earlier, the prime minister said the media should be free.”

Mr. Hata’s employers at Utusan Melayu Bhd., publisher of the Utusan Malaysia daily and owned by the main government party, the United Malays National Organization, took exception to Mr. Hata’s remarks and suspended him from duty. On April 14 a disciplinary panel found Mr. Hata guilty of, among other things, revealing company secrets. He will find out whether he will be dismissed in the next few days.

Executives at the publishing company didn’t respond to requests for comment.

At the same time, the newspaper is stepping up its “1 Malay” campaign to unite ethnic Malays against ethnic Chinese political groups that they accuse of plotting to win political power. A prominent Malay rights group called Perkasa has joined Utusan’s “1 Malay” campaign and some influential ethnic Malay politicians have given their support, despite widespread consternation elsewhere in Malaysia.

The controversy is becoming a significant political headache for the British-educated Mr. Najib. He has tried to distance himself from the ethnic Malay nationalists and, since taking over as premier in 2009, he has tried to woo the support of Malaysia’s ethnic minorities by gradually rolling back a decades-old system of race-based preferences designed to help ethnic Malays catch up with their more prosperous compatriots.

Malaysia’s affirmative action program was introduced in the early 1970s and is one of the most extensive such programs in the world, providing ethnic Malays with discounts on homes, stakes in initial public offerings and better access to universities. In many ways, the policies have helped provide a degree of stability in this racially diverse nation of 28 million people.

But Mr. Najib argues that economic reforms will help lure more investment and propel Malaysia out of the ranks of the developing world’s middle income countries and onto a higher growth path. He has already begun leveling the racial playing field in many key areas and has said he hopes his message will resonate with voters.

By law, Mr. Najib must call a national election by spring 2013, but many analysts say the polls could come earlier, and Mr. Najib has said he is considering the best time to call a vote.

Now, some analysts say the “1 Malay” campaign threatens to alienate the voters Mr. Najib has been trying to win back after many of them voted for opposition parties in the last national elections in 2008. Their shifting allegiance enabled opposition leader Anwar Ibrahim to prevent the ruling National Front from taking a two-thirds majority in Malaysia’s Parliament for the first time in years.

“The biggest problem for the government is that this campaign could backfire,” says Bridget Welsh, an expert on Malaysian politics at the Singapore Management University. “It could bring the opposition closer together, especially in urban areas where race-based politics holds less sway.”

Some analysts say the continuing trial of Mr. Anwar for allegedly breaking Malaysia’s sodomy laws could also tighten opposition ranks, although there is also a risk that the alliance of Islamist and left-leaning groups could crack without the charismatic Mr. Anwar to hold it together. One of Mr. Anwar’s former aides accused the opposition leader of sodomizing him in 2008—an allegation Mr. Anwar denies and describes as part of a political conspiracy to end his political career. The 63-year-old father of six was arrested on a similar charge in 1998, which he also denied, and his subsequent conviction was later overturned in 2004.

In the meantime, the snowballing pro-Malay campaign also indicates that some ethnic Malay hard-liners are giving up on the ruling coalition winning back ethnic Chinese and ethnic Indian voters, some analysts say. Instead, ethnic Malay activists appear to be focusing their efforts on creating a solid voting bloc to ensure the primacy of the National Front, which has ruled Malaysia since independence from Britain in 1957.

And that, economists say, could jeopardize Mr. Najib’s efforts to transform Malaysia’s economy. “It seems he could end up being boxed in by this racialist push,” says Tim Condon, Asia economist with ING in Singapore.

Write to James Hookway at james.hookway@wsj.com

A crying shame really. Guess it is really that hard to let go of the old ways. One wonders though, does this mean that racism is inbuilt in the fabric of the Malaysian media and political establishment? Disappointing really..