The war graves of 840 British Royal Navy sailors were desecrated by Chinese scavengers.
A scrap metal barge illegally towed debris from the sink World War II ships HMS Prince of Wales and HMS Repulse.
The wrecks are designated as British war burial sites and are believed to be protected.
Photos obtained by The Sun show the giant dredger Chuan Hong 68 in the area.
She rowed under a Chinese people flag and was previously associated with illegal salvage operations.
The ship, with a huge crane, was spotted by fishermen who tried to confront it but was chased by a speedboat.
Diver Hazz Zain, who helped protect the wreck, said: “The barge was surrounded by a small boat.
“I informed the enforcement agencies.”
Malaysian Heritage authorities and local police announced they would probe the intrusion.
A scrap yard where some metal had been unloaded was raided by police in Johor.
Photos from the yard show an anchor, a naval gun and large amounts of unexploded ammunition.
Former Navy Admiral Lord West had previously moved to try to protect the wreck – ordered to salvage the Welsh bell after it was targeted by scavengers.
He told The Sun: “They are graves of war — in our waters we take care of them, but in other people’s waters they have to take care of them.
“That is extremely disturbing – Malaysian said they would take care of them.
“I have received letters from relatives of those missing on the ship.
“To think someone is ripping through the metal where the bodies lie, that has a huge impact on their next of kin.”
Police Chief Datuk Kamarul said: “An investigation has begun.
“The British authorities have been informed.”
The Defense Minister “We strongly condemn any desecration of any military graves at sea,” it said.
The battleship HMS Prince of Wales and the battlecruiser HMS Repulse were part of Force Z – attempting to intercept the Japanese preparing to invade the then colonial Malaya (now Malaysia).
Winston Churchill called the news of the double sinking the “most direct shock” he encountered during the Second World War.