The earlier researches on the unconventional settlement of the third world cities have been mostly concerned with their revolutionary potential. However, the real danger to a multi-ethnic society of Malaysia is in the ethnic dimension. The rural-based indigenous Malays, were the dominant group controlling the political sphere, while the urban-based Chinese were the capitalist class. This division initially reflected as a subtle socio-political conflict, but culminated into major urban ethnic riots in 1969. The squatters were mostly blamed for their involvement in the riots. Since then, attempts have been made by the state to address ethnic differences, and a higher level of ethnic integration can be found among higher income groups in urban conventional housing settlements. Hoever, the problem of ethnic spatial segregation in urban squatter settlements is still manifested strongly. This author believes that accurate explanation to the problems is essential in trying to provide the solution. Previous attempts to explain this problem seem to be inconclusive and in isolation to the whole socio-spatill development of the country. The study, therefore, seeks to give a more comprehensive explanation to the above phenomenon by expanding the debate further. The argument of this study is taht : ethnic spatial segration in squatter settlements can only be explained by looking at the development process of the country, as the links between uneven economic development and the role the state plays in mediating groups interets within the development process, constitute contradictions that perpetuate urban squatting and spatial segregation. The study is divided into six chapters; Chapter 1, discussed the prevailing arguments on ethnic spatial segregation in unconventional settlement of Malaysia. This leads to the formulation of a hypothesis, and a discussion on the framework and the theoretical basis of the investigation. Chapter 2, traces the historical development that contributes to the formation of a plural society and the development of the unconventional settlement. Chapter 3, traces the growth and the reasons for squatting since colonial time, and analyses some key socio-cultural and political aspects of squatters within the specific social and physical environment in order to understand the reasons for ethnic division. A review of case studies by previous researches is the basis of the study. Site visits to squatter settlements were done in order to verify certain aspects found in prevoius studies. Chapter 4, examines the reasons for the failure of various housing programmes that perpetuate the growth of segregated squatter settlement. To highlight the problem, comparative study is done on the conventional housing sttlement, where previous studies indicated the existence of higher level of ethnic integration. Chapter 5, examines the pattern of ethnic relation, and the issues taht brought ethnicity to the centre of political conflict. As a conclusion, chapter 6 formulates a coherent explanation to the formation of ethnically segregated settlement. On the basis of the argument, further discussions are made by higlighting aspects that relate to the role of the state. Lastly, suggestions on the possible directions for the development of an integrated settlement are outline based on the understanding gained from the study.