* Militant group says will attack tourists in country
* Industry already weak since Arab Spring in 2011
* Red Sea resorts quiet but some cancellations coming in
* Hotels and operators step up security
By Victoria Bryan and Dominique Vidalon
FRANKFURT/PARIS, Feb 20 (Reuters) - The bombing of a coach carrying Korean holidaymakers in the Sinai peninsula on Sunday has dealt Egyptian tourism a hammer blow, just as it was attempting a fragile recovery from three years of political upheaval.
By killing two holidaymakers near one of Egypt's biggest sea-and-sun resorts, the Islamist militants behind the attack have undermined Egyptian official assurances that foreigners face no threat from the turmoil that has shaken the country since the overthrow of autocrat Hosni Mubarak in 2011.
The Islamist group Ansar Bayt al-Maqdis said it carried out the bombing and has told tourists to leave Egypt, threatening to attack any who are still in the country after Thursday.
Georges Colson, chairman of French travel agency federation SNAV, said his organisation was advising people to choose alternative destinations.
"The winter season is dead, and indications for Easter are that people are not fighting to go to Egypt," he said.
Such warnings strike fear into an industry that provides a livelihood for millions of Egyptians and brings in a large chunk of the country's foreign currency.
Tour operators had been nursing hopes of better days after a dire 2013, when the ousting of President Mohamed Mursi and the killing of hundreds of his supporters tipped the sector back into crisis. Tourism revenue slumped 41 percent last year to $5.9 billion.
European travel companies halted holidays to popular Red Sea resorts like Hurghada, Sharm el-Sheikh and Marsa Alam after the bloodshed that followed Mursi's removal in July.
In September, embassies relaxed travel warnings and many Europeans pining for sunshine during the dark winter months returned to the beach resorts, which lie far from the violence in Cairo and Alexandria and offer direct flight connections.
To the hoteliers, restaurant owners and diving instructors on Egypt's Red Sea coast, it seemed they could find a way to survive the almost permanent unrest in the cities.
Their optimism was founded partly on the presence of roadblocks and police patrols protecting the resorts, with their hotels, golf courses, clipped lawns and soft-sand beaches.
By contrast, famed tourist sites closer to Egypt's towns and cities - the Pyramids of Giza, the Valley of the Kings - have seen only a trickle of visitors since 2011, to the dismay of Nile cruise operators and impoverished trinket sellers who rely on passing trade.
But it is the seaside resorts, offering an experience that differs little from beach holidays from Barbados to Bali, that are the backbone of Egyptian tourism.
The coach bombing was near Taba in southern Sinai, not far from an Israel border crossing often used by vacationers. The explosion killed two South Koreans and one Egyptian.
It was one of the worst attacks targeting tourists since militants struck the Hilton hotel in Taba in 2004, killing 34 people. The resort, which lies three and a half hours drive north of Sharm el-Sheikh, still has a heavy security presence.
Although militants scattered across the desert and mountain landscape have stepped up their activities since Mubarak's overthrow, their insurgency is focused on northern Sinai. Taba was viewed by Western governments as safe for visitors.
But the ultimatum from Ansar Bayt al-Maqdis could deter foreigners from visiting even regions that lie far beyond the Islamist group's base and its main zone of activity.
In Hurghada, hundreds of miles south of Sinai on the Egyptian mainland, boat and beach resort manager Nasser Mazen said he was worried.
"At the moment we only work at 25 percent capacity of what we would normally do in February," he said. "We hope that these attacks will stop. Tourists ... see what's happening in Egypt in the media and postpone their travel to next year or later."
France's Club Med, which runs the Sinai Bay resort in Taba, said it was keeping the site open but had stepped up security and was advising clients not to venture outside the village alone.
The new threats in Egypt are "a situation that is a source of concern for us", a Club Med spokeswoman said.
Some guests have cancelled trips, she said, and Club Med was offering refunds or the chance to book to other destinations.
Marriott, Hilton and Accor have also stepped up security at their hotels in Sinai.
Foreign governments have warned their nationals visiting Egypt's big cities since 2011, but the sense of urgency has grown after Sunday's attack.
The UK embassy in Egypt advised Britons on Wednesday against all but essential travel to most of southern Sinai, home of some of Egypt's busiest resorts. That level of warning did not apply to the region's biggest tourism zone, Sharm el-Sheikh.
A French diplomatic source said: "Given the Egyptian and regional context, all travellers should consider that there is a threat of terrorism. The situation in the Sinai is worrying".
Around 100,000 French tourists travelled to Egypt last year, already just a sixth of the number who visited in 2010.
Only days after the Taba attack, Russia's tour operator association is reporting a fall in bookings and Germany's travel association DRV is bracing for bad news.
"Travel from Germany has simply not recovered since the Arab Spring and any further destabilisation only makes guests more wary," said DRV president Juergen Buechy.
About 975,000 Germans travelled to Egypt in 2013, 15 percent down on 2012 and far below the 1.3 million who travelled there in 2010, the Egyptian tourist office in Frankfurt said.
Russian, Germany and Britain are Egypt's biggest source of tourists. Tour operators such as TUI Travel and Thomas Cook have scaled back the number of Egyptian holidays on offer during the past three years.
European travel companies hit by weak local economies and the turmoil in Egypt now face more pain. The slump in Egyptian business already cut 19 million euros off TUI Travel's operating profits in the first quarter, its parent company TUI AG said last week.
For now, tour operators are not obliged to offer free cancellations and rebookings or to bring people home early.
People already holidaying in the big Red Sea resorts of Sharm, Hurghada and Marsa Alam seemed untroubled by the latest news, tour operators and associations said.
Guests are being kept up to date with news and travel advice, but none have asked to come home early, representatives of Italian and German tour operators told Reuters.
But many have cancelled day trips to far-flung spots within Sinai such as St Catherine's Monastery.
"We cannot prevent clients from going to Egypt but it is our role to warn them about the risk," said Colson of France's SNAV.