Hours after news of the arrest of 17 suspects, lawmakers passed an anti-terrorism bill early on Tuesday following more than 10 hours of debate on legislation that reintroduces detention without trial three years after it was revoked.
Police arrested the 17 on Sunday saying they wanted to establish an Islamist regime in the Muslim-majority Southeast Asian country.
"The purpose of this new terrorist group is to establish an Islamic country a la IS in Malaysia," police chief Khalid Abu Baker said in a statement on Tuesday.
Malaysia has not seen any significant militant attacks but has arrested 92 citizens on suspicion of links to the Islamic State. Authorities have identified 39 Malaysians in Syria and Iraq.