Announcing the setting up of the Eastern Sabah Safety Zone (ESSZONE), Prime Minister Najib Razak Najib said the armed incursion posed a long-term security threat in the eastern state of Sabah, which for centuries has had a porous sea border with the southern Philippines.
"The primary cause of the invasion of terrorists ... Is the existence of settlements considered easily exposed to the danger of infiltration by illegal immigrants and stateless persons," he said.
The Filipinos claimed that the state belonged to the former Sultan, reviving a centuries-old territorial row.
The incursion and counter-attack by the Malaysian police and security in early March has left more than 60 Filipinos dead along with 10 Malaysian security personnel.
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Attorney-general Abdul Gani Patail said self-proclaimed Raja Muda of Sulu Azzimudie Kiram will have to stand trial in Malaysia for leading an armed invasion of Lahad Datu in Sabah.
Azzimudie, who also goes by the name Agbimuddin, was reported to have slipped out of the country and gone into hiding since March 11 after Malaysian security forces launched a counter-offensive to flush out the armed Sulu militants he led in an invasion of Lahad Datu.
The residents of areas deemed vulnerable to foreign infiltration will be relocated.
Though the security forces are at work to nab all the remaining militants, many have reportedly escaped the area and could have merged with thousands of Filipinos ,many from Sulu, living in Sabah, which has about 3 million people.