Egypt criticises U.S. aid cuts, Washington says not severing ties


* Army-backed cabinet finds U.S. decision strange

* Kerry says some aid could resume, depending on poll plan

* U.S. decision exposes differences with Saudi Arabia,Israel

* Washington will still support counter terrorism in Sinai

By Yasmine Saleh and Yara Bayoumy

CAIRO, Oct 10 (Reuters) - Egypt criticised on Thursday aU.S. decision to curtail military and economic aid to Cairoafter a crackdown on the Muslim Brotherhood, although Washingtonstressed it was not severing ties with its long-standing ally.

The army-backed government insisted Egypt would not bow toU.S. pressure, saying it found the decision strange at a timewhen the country was "facing a war against terrorism".

However, U.S. Secretary of State John Kerry said Washingtonwould consider resuming some of the aid "on a basis ofperformance" in following the interim government's "roadmap"that promises to lead to fair elections.

Washington faces a dilemma in dealing with its majorregional ally; Egypt controls the strategic Suez Canal and has apeace treaty with neighbouring Israel but its army overthrew inJuly the first freely-elected president, Islamist Mohamed Mursi,after mass protests against his rule.

In some of the worst civilian violence in modern Egyptianhistory, security forces crushed protests by Mursi's supporters.Militant Islamists, who have been attacking Egyptian forces inthe Sinai peninsula for some time, have begun staging assaultsin or near major cities including Cairo.

The United States said on Wednesday it would withholddeliveries of tanks, fighter aircraft, helicopters and missilesto Cairo as well as $260 million in cash aid, but left someother aid programmes intact.

The Egyptian cabinet criticised the announcement. "Thegovernment expressed the strangeness of the decision which wasissued at such a vital time during which Egypt is facing a waragainst terrorism," it said in a statement.

Foreign Ministry spokesman Badr Abdelatty also reacted withdefiance. "The decision was wrong. Egypt will not surrender toAmerican pressure and is continuing its path towards democracyas set by the roadmap," he told the Radio FM station.

However, he also said Egypt was "keen on continuing goodrelations with the United States".

The U.S. position exposes differences with its Gulf allySaudi Arabia, which had welcomed Mursi's removal and has lavished financial support to the new government. It also raisesthe question of where Egypt, the second largest recipient ofU.S. aid after Israel, could now turn for more military aid.

Israel has also struggled to hide its frustration, fearingthe move could damage Washington's standing in the region andundermine its own peace treaty with Egypt.


Kerry said Washington wanted to make certain the roadmap tonew elections remained a primary goal of the interim government.

"... by no means is this a withdrawal from our relationshipor a severing of our serious commitment to helping thegovernment," he told reporters on a visit to Malaysia.

Egypt's cabinet agreed on Thursday to a draft law that wouldregulate public gatherings and peaceful protests, a move thatcould make it harder for Islamist groups and other opponents ofthe state to demonstrate.

Washington has long provided Egypt with about $1.55 billionin annual aid, including $1.3 billion for the military.

An Egyptian military source declined to give details on whateffect the decision could have on military hardware asdisclosing such information would harm national security.

Credit ratings agency Fitch said the U.S. decision had a"limited overall impact on the country's external finances" andwas not significant for its debt profile.

Washington said military support would continue for counterterrorism, counter-proliferation and security in the Sinai,which borders Israel. It will also provide funding in areas suchas education, health and private sector development.

Egypt's private, anti-Islamist leaning Tahrir newspaper wasbolder in its criticism, with a headline proclaiming, "Let theAmerican aid go to hell".

Political scientist Mustapha al-Sayyid said the decisionshowed Washington's unhappiness with police treatment of theBrotherhood, and this could "lead to a shift in the ministry ofinterior's ways of dealing with the protesters".

"I think the decision could be retracted soon, once Egyptfinalises its constitution and moves towards elections," headded.


The Brotherhood refuses to work with the military, which itsays staged a coup and sabotaged Egypt's democratic gains aftera revolt toppled autocratic President Hosni Mubarak in 2011.

The military denies it carried out a coup, saying it respondedto the will of the people.

Security forces have crushed two pro-Mursi protest camps,killing hundreds, and arrested scores from the group, includingmuch of the senior leadership.

Mursi has been held in a secret location since hisoverthrow. He is due to face trial on Nov. 4 on charges ofinciting violence, in a move that is likely to further inflametensions between the army and the Brotherhood.

The government also declared a state of emergency andimposed a curfew. A court order has banned the Brotherhood,Egypt's oldest and most influential Islamist group, thatdominated national elections after Mubarak's overthrow.

In the latest violence, pro-Mursi supporters clashed withsecurity forces and political opponents on Sunday, with statemedia reporting 57 people dead.

Raising the risk of more bloodshed, the Brotherhood's political wing, the Freedom and Justice Party, called for a"million-man march" in Cairo on Friday to head towards TahrirSquare, cradle of the demonstrations that overthrew Mubarak.

On Thursday, one police and four army conscripts were killedin a car bomb attack in the Sinai, security sources said.

Brigadier Abdelnasser al-Adheb was quoted as tellingstate-run website al-Ahram that security forces had arrested"five terrorist elements" who were behind an attack at a statesecurity building in South Sinai earlier this week in whichthree conscripts were killed.

The al Qaeda-linked group, Ansar Bayt al-Maqdis, claimedresponsibility for that attack in an online statement, whoseveracity could not be immediately authenticated.

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