Analysts said the announcement, made live on national television on Saturday, aimed to rally Najib's United Malays National Organisation (Umno) ahead of party elections but could hurt an already slowing economy.
The premier promised more business and training opportunities and affordable housing for Muslim Malays and other indigenous groups, collectively known as "bumiputra" or "sons of the soil", who make up 68% of the country's 28 million people.
He said his government would set up a 10-billion-ringgit (100 billion baht) trust fund to expand education, home ownership and other measures. It will also provide 700 million ringgit to support young Malay entrepreneurs, he said.
Government-linked companies would be urged to give more contracts and concessions to ethnic Malays but on a merit basis, the prime minister insisted.
The government will also identify state-owned companies that can be sold to Malays and indigenous people, he said.
"We want to build a new community," Najib said. "A bumiputera entrepreneur who can compete and who is knowledgeable in all skills.
"If we do not bring up the economic participation of the bumiputras, the country will not be able to achieve developed nation status by 2020.
"Certainly we are doing what is fair, we are doing what is right and we are doing what is equitable."
Malays and other indigenous groups have benefited from privileges, including reserved university slots and government jobs and contracts, since the 1970s, introduced to close a wealth gap with the Chinese minority.
But critics, including a growing number of Malays, say the policy reduces the competitiveness of Southeast Asia's third largest economy and is abused by the elites to benefit themselves.
Chinese voters deserted the governing coalition in droves in elections earlier this year. They say four decades of affirmative action programmes have done little for average Malays, but have entrenched corruption and business cronyism at the top.
In 2010, a year after taking office, Najib vowed an overhaul of racial preferences as part of wider economic reforms.
But since then, he has only made limited moves, including some changes to liberalise the banking and services sectors, as he faces resistance, especially from his own Malay-based party.
Ibrahim Suffian of the independent pollster Merdeka Centre said Saturday's announcement showed any deeper reforms were further "postponed".
"He is shoring up support of the Malays, particularly business people and contractors," he told AFP. "He's appealing to the base."
Najib is not expected to face a leadership challenge in the Umno elections next month but is under pressure from hardliners to stand up for Muslim Malay rights.
The mostly non-Muslim Chinese, who account for 25% of the population, continued to vote against Najib's Barisan Nasional coalition in the May general election - a trend that began in 2008.
Umno is the dominant party in the multi-racial Barisan coalition which has ruled the country since independence in 1957 but whose performance in the last two elections has slipped.
Wan Saiful Wan Jan of the Institute for Democracy and Economic Affairs said Najib's reluctance to dismantle the affirmative action policy would harm Malaysia's economy in the long-run.
"It will definitely have a negative impact on the economy," he said. "The announcement today further enhances the role of government in the economy."
Last month, Malaysia lowered its economic growth forecast for the year to a range between 4.5% and 5%, down from 5-6%, amid weak export data.
Najib, 60, was a teenager when riots erupted between Muslim Malays and ethnic Chinese in Kuala Lumpur in 1969. His father Abdul Razak Hussein became prime minister the following year and responded with a program to reduce Chinese dominance in business by giving preferential treatment to Malays and indigenous people.
The measures have provided bumiputeras with cheaper housing as well as priority for university places, government contracts and shares of publicly traded companies.
While this group makes up about 60% of Malaysia’s 29 million population, it held 23% of equity ownership based on par value in 2011, the Bernama news agency has reported.