KUALA LUMPUR - Malaysia's foreign direct investment fell 56% to $3.4 billion in 2020, a government report said on Tuesday, as the COVID-19 pandemic hit economic activity globally and in the trade-reliant Southeast Asian nation.

Malaysia's economy contracted 5.6% last year, marking its worst performance since a 7.4% fall in 1998 during the Asian Financial Crisis.

Net foreign investment totalled 13.9 billion ringgit ($3.43 billion) in 2020, down from 31.7 billion ringgit the previous year, according to a report published by the Malaysian Investment Development Authority (MIDA).

"Malaysia’s lower net FDI inflows in 2020 is not necessarily an unfavourable sign, when taking into consideration the global investment landscape and the uncertainties that prevailed during the year," MIDA said in its report.

Foreign investment flows hit negative territory in the third quarter when they fell 0.8%, the first time since the fourth quarter of 2009 in the aftermath of the U.S. subprime crisis, according to the report.

Malaysia, however, saw gross foreign investment inflows rise 0.8% last year, MIDA said.

MIDA said the country brought in 64.2 billion ringgit worth of approved foreign investments, primarily in the manufacturing sector, in 2020.

In January, the United Nations Conference on Trade and Development said in a report that foreign investment inflows in Malaysia fell 68% last year, the worst rate in Southeast Asia.

($1 = 4.0520 ringgit)

(Reporting by Joseph Sipalan Editing by Ed Davies) ((Joseph.Sipalan@thomsonreuters.com; +60394929425; Reuters Messaging: joseph.sipalan.thomsonreuters.com@reuters.net))