"The very fact that they lump LGBT people under a category called 'gender confusion' shows that the authorities are very much confused themselves," Pang Khee Teik, a well-known local activist, told AFP.
"It is mind-blowing that a government agency wants the whole country to be sucked into its confluence of confusion," the activist added.
Contestants are invited to submit a video clip addressing various categories including gayness or "gender confusion", and offering suggestions as to how these could be "prevented or controlled".
Winners will receive between 1,000 and 4,000 ringgit ($235-$940) after the competition closes at the end of August, the ministry's website said.
The short video clips need to focus on "prevention, control and how to get help" as well as "issues and consequences".
The guidelines described the overall theme of the video contest as: "Value Yourself, Healthy Lifestyle Practice."
"Each work will be judged on originality, content, concept and creativity and quality production by a panel of judges appointed by the organizers," according to the health ministry's website.
Participants in the competition can also make videos about sex and the internet, or sexual health.
A health ministry spokesman declined to comment. AFP was unable to immediately contact other health ministry officials.
Homosexuality is forbidden in Malaysia, where laws criminalising sodomy can result in imprisonment, corporal punishment and fines.
Pang said LGBT people have difficulty accessing good medical services in Malaysia due to a distrust of health care authorities.
"This kind of contest will only add to the confusion and distrust and fear," he warned.
Nisha Ayub, Malaysia's most prominent LGBT activist, said health authorities were initiating hatred and discrimination against the community in Malaysia.
"The ministry needs to revise this and think about their actions," added Ayub, who last year became the first transgender woman to be named in the list of International Women of Courage by the US State Department.
Malaysia hit the headlines in March over its attitudes to homosexuality, when the country's film censorship board demanded cuts to Disney's hit movie "Beauty and the Beast" because of a "gay moment". Disney, however, refused to remove the scene and said it would release the film in full.