Under the Anti-Fake News Bill, those convicted of disseminating false content would be jailed or fined up to RM500,000 ($128,000; £90,400), or both.
The bill was tabled in parliament on Monday, ahead of a national election that is expected within weeks.
Critics have called the bill an attempt by the authorities to stifle dissent.
According to the bill, the term “fake news” is defined as “news, information, data and reports which is or are wholly or partly false”.
An offender would be anyone who “by any means, knowingly creates, offers, publishes, prints, distributes, circulates or disseminates any fake news or publication containing fake news”.
Blogs, public forums and social media accounts are also covered by the bill.
It applies to anyone inside or outside Malaysia, as long as the “fake news” published concerns the country or those in it, which means foreigners can technically be sentenced in absentia.
The move has been described as an attempt to silence opposition ahead of the general election. It must be held by August, but is widely expected within the next few weeks.
“The bill is 100% intended to muffle dissent… the punishment is extremely high and what amounts to fake news has been loosely defined,” Eric Paulsen, co-founder of Malaysian human rights group Lawyers for Liberty, told the BBC.
“It also looks like they are rushing through the bill… before the elections. It’s likely that it will be passed.”
He added that the bill could affect reporting stories such as the scandal surrounding 1MDB, Malaysia’s state development fund. It is alleged that hundreds of millions of dollars were “misappropriated” from the fund.
The Wall Street Journal (WSJ) had in 2015 reported it had seen a paper trail that allegedly traced close to $700m from the fund to Malaysian Prime Minister Najib Razak’s personal bank accounts.
Mr Najib has denied taking any money from 1MDB.
Just days ago, a Malaysian minister said any news relating to 1MDB that was not confirmed by the government was false.
“If this is [the government’s] benchmark, then we will have a situation where only the government can determine if things are true or false,” said Mr Paulsen. (Courtesy BBC)