"It is appalling that we have allowed this war-profiteering company to invest in Malaysia," he said in a statement, referring to Halliburton's contracts in Iraq for the U.S. government. "Are we so void of our humanity that we have to allow these war criminals to come in and thrive in our economy?"
Mahathir, who remains a respected figure in the Islamic world after his retirement in 2003 after 22 years in power, urged the government to ban Halliburton from using their "ill-gotten profits to operate in any way" in Malaysia.
Halliburton recently launched a 200 million ringgit ($62.5 million) manufacturing center in the Iskandar Malaysia economic hub in southern Johor state.
Mahathir, a vocal critic of the 2003 U.S.-led invasion of Iraq, accused Halliburton, once led by U.S. Vice President Dick Cheney, of raking in billions of dollars in profits from the Iraq war.
Halliburton's stock price surged from $10 before the war to around $46 now after the company won a series of contracts in Iraq amounting to nearly $20 billion, he said.
"Do we really need the blood money of a neo-conservative entity that has played a role in the murder of innocent Iraqis to fund our development?" he said.
He described Cheney and U.S. President George W. Bush as "war criminals" who should be put on trial for the Iraq war. Mahathir now heads the Perdana Global Peace Organization, a private group.
Iskandar Malaysia chief Ikmal Hijaz Hashim has defended Halliburton's investment, saying it will create jobs and benefit the country. The Iskandar hub is among five massive development programs nationwide by the government to woo investment and spur growth in rural areas.