* Dry weather forecast to continue into March
* Concern about palm oil production
* Singapore ramps up supply of recycled water
* Malaysian cabinet to decide on calling an emergency (Adds report Malaysian state Selangor to restructure water industry, quotes)
By Laura Philomin and Stuart Grudgings
SINGAPORE/KUALA LUMPUR, Feb 26 (Reuters) - Singapore and Malaysia are grappling with some of the driest weather they have ever seen, forcing the tiny city-state to ramp up supplies of recycled water while its neighbour rations reserves amid disruptions to farming and fisheries.
Singapore, which experiences tropical downpours on most days, suffered its longest dry spell on record between Jan. 13 and Feb. 8 and has had little rain since.
Shares in Hyflux Ltd, which operates desalination and water recycling operations in Singapore, have risen 3.5 pct over the past month.
In peninsular Malaysia, 15 areas have not had rainfall in more than 20 days, with some of them dry for more than a month, according to the Malaysian Meteorological Department. The dry weather is expected to run for another two weeks.
The Indonesian province of Riau has also been hit, with parts of the region wreathed in smog, usually caused by farmers setting fires to illegally clear land. Poor visibility has disrupted flights to and from the airport in Pekanbaru.
Malaysian Prime Minister Najib Razak was due to discuss the drought at a cabinet meeting on Wednesday that would decide whether to declare a national emergency, according to state news agency Bernama.
On Wednesday, media said the Malaysian state of Selangor had won approval from the federal government to take over four water firms, with the dry spell forcing an end to a five-year feud over control of water resources.
The state will pay the firms, which include builder Gamuda and water services company Puncak Niaga, 9.65 billion ringgit ($2.94 billion) to their owners in compensation.
While some dry weather is expected at this time of year, the abnormal lack of rain is raising concern about the pace of climate change.
"The concern is that these uncommon weather events may be happening more frequently sooner rather than later," said National University of Singapore researcher Winston Chow.
PALM OIL PRICES HIT
Malaysia is the world's second-largest producer of palm oil and planters say dry weather lasting more than two months can hurt yields six months to two years down the line, affecting output and fuelling benchmark Kuala Lumpur prices.
Concern the weather will hurt production has helped push up palm oil prices about 8 percent in February, setting the market on track for its biggest monthly gain in four months.
The lack of rain is also believed to have caused extensive damage to the rice crop.
In Singapore, the dry weather is being blamed in part for the death of fish stocks at several offshore farms. About 160 tonnes of fish have died in recent weeks because of a lack of oxygen in the water.
The Malaysian Fire and Rescue Department said it had got more than 7,000 calls about forest and bush fires nationwide since early February, five times more than usual.
Selangor, Malaysia's richest and most industrialized state, began limited water rationing on Tuesday as levels in its dams plunged to critical lows.
"We pledge that every consumer will receive water, but it will be rationed to ensure supply every two days," Bernama quoted state chief minister Abdul Khalid Ibrahim as saying.
"In a week, consumers will receive water for four days."
The state of Negeri Sembilan, near Kuala Lumpur, declared a "state of crisis" over the water shortage last week.
In Singapore, the Public Utilities Board has boosted the supply of recycled water, known as NEWater, and desalinated supplies, to keep up reservoir levels.
Singapore's national security concerns mean it has developed into one of the world leaders in water technology as it tries to cut reliance on imported supplies from Malaysia.
About 55 percent of Singapore's water is now desalinated or recycled, in line with an aim to be self-sufficient by 2061, when a 1962 agreement to buy 250 million gallons per day from Malaysia ends, according to the board.
The deal lets Singapore buy the Malaysian water at 0.03 ringgit ($0.01) per 1,000 gallons, and sell back treated water for 0.50 ringgit per 1,000 gallons.
Some experts say while Singapore is coping well with the dry spell, it needs to diversify its water supplies further.
"The expectation of the large increase of NEWater and desalination water may not be practical due to their much higher cost than imported water and catchment water," said Pat Yeh, assistant professor in the Department of Civil and Environmental Engineering at National University of Singapore.
Johor, the Malaysian state that borders Singapore, has been urging an early re-negotiation of the water deal, saying it is too advantageous to the city-state.
"The talks should begin immediately," Hasni Mohammad, chairman of a public works panel, told Bernama in a recent interview. "We have long been in a losing position." (Additional reporting by Niluksi Koswanage; Writing by Rachel Armstrong; Editing by Clarence Fernandez and Robert Birsel)