Malaysian opposition figure Anwar Ibrahim has been freed on police bail, his lawyers said on Thursday, but the lingering threat of a sodomy charge stoked political tensions and cast gloom on financial markets.

Anwar, who is fighting the allegation brought by a former aide, was allowed bail on condition that he reports to police on August 18, his lawyers said.

"Anwar has left the building at 9.45 am (0145 GMT)," R. Sivarasa, one of Anwar's lawyers, told reporters outside the police headquarters. "He was driven off in his wife's car through the back exit."    

His lawyers said the authorities could still press charges against him later.

The former deputy premier was arrested on Wednesday and had spent the night in police custody after the authorities remanded him to help in investigations.

Sodomy, even between consenting adults, is a crime punishable by up to 20 years in prison in mainly Muslim Malaysia.

Anwar, a former deputy premier who is having eyeing the country's leadership position after being sacked a decade ago, has said the sodomy allegation was a political ploy aimed at destroying the opposition.

The Anwar saga has dealt a blow to investor sentiment, provoking fears of political instability and stirring worries of a sudden change of government and policy.

The stock market erased early gains to finish down 0.4 percent by the midday break, while the ringgit currency weakened slightly against the dollar.

"Politics in Malaysia is getting pretty dirty, and that obviously will have a negative impact on foreign investment," said the research head of a local brokerage, who declined to be named.

Unlike his sacking and arrest in 1998 which drew tens of thousands onto the streets, there was scant show of public support for Anwar this time round.

About 400 supporters gathered outside the police headquarters after Anwar's arrest on Wednesday and no more than 30 followers were at his house on Thursday after he was freed on bail, some bearing banners touting him as premier and calling for an end to what they said was a political conspiracy.

A senior police official confirmed Anwar had received police bail. "There is no intention to remand him further," said the official who declined to be identified. "Statements were taken and we will have to decide on next course of action."    

Home Minister Syed Hamid Albar said the case had hurt Malaysia's international reputation. "It has created some negative perception. He has shown the country in a very unfair light," he told reporters.

"I do not exclude that (bringing in foreign experts) to obtain scientific evidence. But it must not interfere with the sovereignty of the country and the way we conduct our laws."    

Deputy prime minister Najib Razak defended the police action in arresting Anwar before he had turned up voluntarily to meet investigators, as his lawyers say had been arranged.

"We should be transparent so that there will be no apprehension about what the police are doing," he said. "And we must always treat Anwar Ibrahim with the degree of decorum and respect that he deserves."     Anwar will give a press briefing at 2 p.m. (0600 GMT).

"He spent the night in a lockup on a cold cement floor and as a result that has aggravated his backache," Anwar's lawyer Sivarasa said. "He was in some pain this morning."    

Anwar's opposition alliance has capitalised on public anger against rising prices and political scandals involving the government to win political mileage.

It needs 30 more seats to win a simple majority and form the government after it won a record 82 seats in the 222-seat lower house of parliament in the March general election.

Anwar was sacked as deputy prime minister in 1998 and later jailed for corruption a