KUALA LUMPUR, Nov 25 (AFP) - 13:21 - Thousands of Malaysians, shouting "Down, Down, Mahathir" and other slogans, protested Saturday against the government's takeover of oil revenues which previously went directly to an opposition-ruled state.

Supporters of the Parti Islam SeMalaysia (PAS) and other opposition parties thronged the roads outside the finance ministry as opposition officials went in to deliver a protest memorandum.

Men in white skullcaps and women in Islamic headscarves held up banners reading "Defend the Terengganu people's rights" and "Royalty Rapist -- Beware UMNO."

Riot police with tear gas launchers, a water cannon and a police helicopter were deployed but no incidents were reported.

PAS took control of the Terengganu state assembly in the northeast in elections in November 1999 in a bitter blow to Prime Minister Mahathir Mohamad's nationally ruling United Malays National Organisation (UMNO).

In September the federal government seized control of annual oil payments which previously went directly to the state government, sparking a storm of protest.

Kuala Lumpur says the state has no legal right to oil royalties since its oil reserves are too far offshore. It says the annual payment from national oil firm Petronas has always been a "goodwill contribution."

The federal government says it will spend the money directly to help the people of the state. Opposition parties accuse it of trying to undermine the Terengganu administration.

This year's payment is worth an estimated 810 million ringgit (213 million dollars).

"No matter what reason given by the federal government for withdrawing the royalty payment, the people have interpreted the move as childish and as political revenge," PAS official Mohamad Hatta Ramli said in the memorandum.

Mohamad Hatta said the PAS government had to take over 700 million ringgit worth of debts left by the previous UMNO state government.

"If the PAS government ... in Terengganu is forced to inherit the debts, why are we not allowed to inherit the 'assets' of oil royalty?"

After presenting the memorandum, he told reporters much larger protests would be staged in future unless the government reversed its stand.

Malaysian police have wide powers to ban any demonstration but were notably restrained Saturday and did not try to disperse the crowd.

Protest organisers tried to keep roads clear and demonstrators shook hands with red-helmeted riot police before leaving.

On November 5 police in neighbouring Selangor state used water cannon and tear gas to break up another protest. A total of 125 people were arrested and 26 of them said they were beaten up.