The union however, was unstable due to distrust and ideological differences between leaders of the State of Singapore and the federal government of Malaysia. Such issues resulted in frequent disagreement within politics, economic, financial and social policies. The conflict spread to the populace, resulting in major racial riots in 1964 in Singapore. In 1965, Malaysian Prime Minister Tunku Abdul Rahman decided upon the expulsion of Singapore from the Federation, leading to the Independence of Singapore on 9 August 1965.
Racial tensions increased dramatically within a year and were fuelled by Barisan Sosialis's tactics of stirring up communal sentiment as the pro-communist party sought to use means to survive against the crackdown by both the government of Singapore and the Federal Government. In particular, the Chinese in Singapore disdained being discriminated against by Federal policies of affirmative action, which granted special privileges to the Malays guaranteed under Article 153 of the Constitution of Malaysia. There were also other financial and economic benefits that were preferentially given to Malays. Islam was the sole official religion, although non-Muslims maintained the freedom of worship.
The Malays and Muslims in Singapore were being increasingly incited by the federal government's accusations that the PAP was mistreating the Malays. Numerous racial riots resulted, and curfews were frequently imposed to restore order. The external political situation was also tense at the time, with Indonesia actively against the establishment of the Federation of Malaysia. President Sukarno of Indonesia declared a state of Konfrontasi (Confrontation) against Malaysia and initiated military and other actions against the new nation, including the bombing of MacDonald House in March 1965 by Indonesian commandos which killed three people. Indonesia also conducted sedition activities to provoke the Malays against the Chinese.
One of the more notorious riots was the 1964 Race Riots that took place on Prophet Muhammad's birthday on July 21, near Kallang Gasworks with twenty-three killed and hundreds injured. Additional riots broke out in September 1964. The price of food heavily skyrocketed when the transport system was disrupted during this period of unrest, causing further hardship. The Government later introduced the Racial Harmony Day, which falls on the same date as the riots.
The federal government of Malaysia, dominated by the United Malays National Organization, feared that as long as Singapore remained in the Federation, the bumiputra policy of positive racial discrimination to the Malays would be undermined and therefore not in the interest of their pro-Malay agenda. One of the major causes of this fear was the fact that the PAP continued to repeatedly cry for a "Malaysian Malaysia!" - the fair and equal treatment of all races in Malaysia, by serving Malaysian citizens, rather than the Malay race. Another contributor was the fear that the economic dominance of Singapore's port would inevitably shift political power away from Kuala Lumpur in time, should Singapore remain in the federation.
The state and federal governments also had disagreement on the economic front. Despite earlier agreement to establish a common market, Singapore continued to face restrictions when trading with the rest of Malaysia. In retaliation, Singapore did not extend to Sabah and Sarawak the full extent of the loans agreed to for economic development of the two eastern states. The situation escalated to such intensity that talks soon broke down and abusive speeches and writings became rife on both sides. UMNO extremists called for the arrest of Lee Kuan Yew.
On August 7, 1965, Prime Minister Tunku Abdul Rahman, seeing no alternative to avoid further bloodshed, advised the Parliament of Malaysia that it should vote to expel Singapore from Malaysia. Despite last-ditch attempts by PAP leaders, including Lee Kuan Yew, to keep Singapore as a state in the union, the Parliament on August 9, 1965 voted 126-0 in favour of the expulsion of Singapore, with members of Parliament from Singapore not present. On that day, a tearful Lee Kuan Yew announced that Singapore was a sovereign, independent nation and assumed the role of prime minister of the new nation. His speech included this quote: "For me, it is a moment of anguish. All my life, my whole adult life, I have believed in merger and unity of the two territories." Hence, Singapore became the only country in the history of the modern world to gain independence against its own will.