Malaysia's long-serving former leader Mahathir Mohamad will run in this year's election as head of an opposition alliance - a move that poses a significant threat to Prime Minister Najib Razak who is mired in corruption allegations.

Mahathir, 92, was chosen on Sunday to lead the opposition after putting aside a decades-old feud with popular politician Anwar Ibrahim, who is currently jailed on a conviction for sodomy.

Anwar's wife, Wan Azizah, will run alongside Mahathir in a bid to be deputy prime minister.

If the opposition alliance wins, it plans to pardon Anwar and install him as prime minister, its Secretary-General Saifuddin Abdullah said.

Malaysia's election must be called by August, but speculation is mounting it will be held in the next few months.

The decision to pick Mahathir as candidate was endorsed by senior leaders of the four-party coalition, Pact of Hope, at their convention outside of Kuala Lumpur, rousing cheers by hundreds of supporters.

"Our great focus is to save our beloved country," Mahathir said in a speech. "It wasn't easy for the parties that were my enemies before to accept me, but they are aware of the importance of bringing down the current government."

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Known for his authoritarian ways, Mahathir returned to political life after stepping aside 15 years ago, to take on Najib amid public anger over corruption accusations involving state investment fund 1Malaysia Development Berhad (1MDB).

In civil lawsuits, the US Justice Department has alleged about $4.5bn was misappropriated from 1MDB.

The fund has denied any wrongdoing, and Najib - who founded 1MDB in 2009 - has denied all allegations. He was also cleared of wrongdoing by Malaysia's attorney general.

Najib's United Malays National Organisation (UMNO) has led the country in a coalition since independence from Britain in 1957.

Anwar, 70, was once a protege of Mahathir, but they had a falling out in the late 1990s. Mahathir sacked Anwar as deputy prime minister and he was later jailed for sodomy and corruption - charges he dismissed as politically motivated.

Mahathir acknowledged the suffering of Anwar and his family on Sunday.

"I know how Anwar feels. It was during my administration that he was sent to [prison]. It is not easy for him to accept me and shake my hand," The Malaysia Insight quoted Mahathir as saying.

"And it's not just Anwar but his family as well who felt pressure when he was jailed. They suffered for 20 years."