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By Patricia Zengerle and Arshad Mohammed WASHINGTON (Reuters) - The United States said on Wednesday it would withhold deliveries of tanks, fighter aircraft, helicopters and missiles as well as $260 million in cash assistance from Egypt's military-backed government pending progress on democracy and human rights. The decision, described by U.S. officials, demonstrates U.S. unhappiness with Egypt's path since its army on July 3 ousted Mohamed Mursi, who emerged from the Muslim Brotherhood to become Egypt's first democratically elected leader last year. But the State Department said it would not cut off all aid and would continue military support for counterterrorism, counter-proliferation and security in the Sinai Peninsula, which borders U.S. ally Israel. It also said it would continue to provide funding that benefits the Egyptian people in such areas as education, health and the development of the private sector. The split decision illustrates the U.S. dilemma in Egypt: a desire to be seen promoting democracy along with a need to keep up cooperation with a nation of strategic importance because of its control of the Suez Canal, its 1979 peace treaty with Israel and its status as the most populous nation in the Arab world. "We will ... continue to hold the delivery of certain large-scale military systems and cash assistance to the government pending credible progress toward an inclusive, democratically elected civilian government through free and fair elections," State Department spokeswoman Jen Psaki said in a statement. Mursi's supporters and security forces have repeatedly clashed since the Islamist president's ouster, including on Sunday, one of the bloodiest days since the military took power, with state media reporting 57 people dead. UNCLEAR WHAT EFFECT U.S. DECISIONS WILL HAVE ON EGYPT Jon Alterman, director of the Middle East program at the Center for Strategic and International Studies think tank in Washington, said it was doubtful Washington would gain any leverage over Cairo by withholding the aid. "It may make some Americans feel better about the U.S. role in the world, but it's hard to imagine how it changes how the Egyptian government behaves," he said. On September 24, President Barack Obama said Washington would continue to work with the interim authorities in Cairo, but faulted them for anti-democratic moves such an emergency law and restrictions on opposition parties, the media and civil society. Speaking to reporters in a conference call, U.S. officials said the United States would withhold deliveries of M1A1 Abrams tank kits made by General Dynamics Corp, F-16 aircraft produced by Lockheed Martin Corp, and Apache helicopters and Harpoon missiles built by Boeing Co. But they stressed the withholding of such big-ticket military items was not meant to be permanent and would be reviewed periodically along with Egypt's progress on human rights and democracy. U.S. Defense Secretary Chuck Hagel called Egyptian army chief General Abdel Fattah al-Sisi to tell him about the U.S. decisions, speaking for about 40 minutes in what one U.S. official described as a friendly conversation. Hagel stressed the importance of the U.S.-Egypt relationship but also underscored the U.S. view that Egypt needed to make progress toward democracy. On August 14, Egypt's military-backed authorities smashed the two pro-Mursi sit-ins in Cairo, with hundreds of deaths, and then declared a state of emergency and imposed a curfew. Many of the Brotherhood's leaders have been arrested since. Officials at Lockheed Martin, Boeing and General Dynamics Corp declined comment, referring queries to the U.S. government or military offices handling the weapons sales. The United States has struggled to define its policy toward Egypt since the 2011 popular revolution that toppled its longtime ally, Hosni Mubarak, an authoritarian who had ruled the country for three decades. While the United States tried to work with Mursi, announcing in March that it would give Egypt $250 million in economic aid, including $190 million in budget support, it became disenchanted with his failure to enact economic reforms or govern in a manner that brought the opposition into the political discourse. Egypt for decades has been among the largest recipients of U.S. military and economic aid because of its 1979 peace treaty with U.S. ally Israel, which agreed as a result of the pact to withdraw from the Sinai Peninsula it seized from Egypt in 1967. The United States has long provided Egypt with about $1.55 billion in annual aid, including $1.3 billion for the military. (Additional reporting by Mark Felsenthal; Steve Holland; Roberta Rampton; Andrea Shalal-esa and Phil Stewart; Writing by Arshad Mohammed; Editing by Peter Cooney)