can i still apply for fiancee visa?

Hello, I am going to apply for settlement application as a fiancée in UK and I am Malaysian. The problem is I have been overstayed in UK due to home office has been keeping my passport for 2 years when I tried to apply for student visa. I have just got reply from home office which they decided to refuse my student application and going to send me back home. They also will endorse stating that I have been served with illegal entry paper (IS151A) on my passport. Will this affect my new settlement application? What most sufficient documents should I enclosed? I have only been dating with my fiancé for 15 months, but we are sincerely in love and planning to marry in the end of the year. What questions will they normally ask in the interview? My mother and step-dad are British citizen, and my sister also a permanent resident in UK.I have worked in UK until I was told I shouldn’t, will they ask about where's my money came from? Should I tell them truth that I have broken the rules? I am desperate to seek for some advice. Thanks a lot.

They also will endorse stating that I have been served with illegal entry paper (IS151A) on my passport.

Need more info than that.  They wouldn't serve you with an IS151A for a failed student visa application, unless the case were considerably more complex.  What actually happened?

ok,here's my story.i entered into UK in March 2002.i was only thinking to visit my family here (my mum,step-dad and sister).then my mum wanted me to study here instead going back to M'sia.i apply for student visa in October 2002 and was granted for one year .i enrolled some courses in college and when came to the second year,i was just about to apply for University.but,i need my passport due to i am a international student.then i just realized my visa is actually out of date.i apply for extension student visa straight away after i aware the mistake.i post the application off in May,2004.my passport has been keeping by home office for 13 months and i just got refused for the application.then i was told i can apply as fiancee to re-enter UK.i will be sent back in next week.but i am so worried about my application.

Well, that explains the illegal entry bit.  Plus an out of time extension.  But still, it's not exactly a desparate sprint along the tracks through the Eurotunnel, is it?.  Have your fiance book an advisor before you go, and whatever you do, don't get removed at public expense.  The app should be managed from here.