By Yasmine Saleh and Yara Bayoumy
CAIRO (Reuters) - Egypt criticized on Thursday a U.S. decision to curtail military and economic aid to Cairo after a crackdown on the Muslim Brotherhood, although Washington stressed it was not severing ties with its long-standing ally.
The army-backed government insisted Egypt would not bow to U.S. pressure, saying it found the decision strange at a time when the country was "facing a war against terrorism".
However, U.S. Secretary of State John Kerry said Washington would consider resuming some of the aid "on a basis of performance" in following the interim government's "roadmap" that promises to lead to fair elections.
Washington faces a dilemma in dealing with its major regional ally; Egypt controls the strategic Suez Canal and has a peace treaty with neighboring Israel but its army overthrew in July the first freely-elected president, Islamist Mohamed Mursi, after mass protests against his rule.
In some of the worst civilian violence in modern Egyptian history, security forces crushed protests by Mursi's supporters. Militant Islamists, who have been attacking Egyptian forces in the Sinai peninsula for some time, have begun staging assaults in or near major cities including Cairo.
The United States said on Wednesday it would withhold deliveries of tanks, fighter aircraft, helicopters and missiles to Cairo as well as $260 million in cash aid, but left some other aid programs intact.
The Egyptian cabinet criticized the announcement. "The government expressed the strangeness of the decision which was issued at such a vital time during which Egypt is facing a war against terrorism," it said in a statement.
Foreign Ministry spokesman Badr Abdelatty also reacted with defiance. "The decision was wrong. Egypt will not surrender to American pressure and is continuing its path towards democracy as set by the roadmap," he told the Radio FM station.
However, he also said Egypt was "keen on continuing good relations with the United States".
The U.S. position exposes differences with its Gulf ally Saudi Arabia, which had welcomed Mursi's removal and has lavished financial support to the new government. It also raises the question of where Egypt, the second largest recipient of U.S. aid after Israel, could now turn for more military aid.
Israel has also struggled to hide its frustration, fearing the move could damage Washington's standing in the region and undermine its own peace treaty with Egypt.
Kerry said Washington wanted to make certain the roadmap to new elections remained a primary goal of the interim government.
"... by no means is this a withdrawal from our relationship or a severing of our serious commitment to helping the government," he told reporters on a visit to Malaysia.
Egypt's cabinet agreed on Thursday to a draft law that would regulate public gatherings and peaceful protests, a move that could make it harder for Islamist groups and other opponents of the state to demonstrate.
Washington has long provided Egypt with about $1.55 billion in annual aid, including $1.3 billion for the military.
An Egyptian military source declined to give details on what effect the decision could have on military hardware as disclosing 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" and was not significant for its debt profile.
Washington said military support would continue for counter terrorism, counter-proliferation and security in the Sinai, which borders Israel. It will also provide funding in areas such as education, health and private sector development.
Egypt's private, anti-Islamist leaning Tahrir newspaper was bolder in its criticism, with a headline proclaiming, "Let the American aid go to hell".
Political scientist Mustapha al-Sayyid said the decision showed Washington's unhappiness with police treatment of the Brotherhood, and this could "lead to a shift in the ministry of interior's ways of dealing with the protesters".
"I think the decision could be retracted soon, once Egypt finalizes its constitution and moves towards elections," he added.
The Brotherhood refuses to work with the military, which it says staged a coup and sabotaged Egypt's democratic gains after a revolt toppled autocratic President Hosni Mubarak in 2011. The military denies it carried out a coup, saying it responded to the will of the people.
Security forces have crushed two pro-Mursi protest camps, killing hundreds, and arrested scores from the group, including much of the senior leadership.
Mursi has been held in a secret location since his overthrow. He is due to face trial on November 4 on charges of inciting violence, in a move that is likely to further inflame tensions between the army and the Brotherhood.
The government also declared a state of emergency and imposed a curfew. A court order has banned the Brotherhood, Egypt's oldest and most influential Islamist group, that dominated national elections after Mubarak's overthrow.
In the latest violence, pro-Mursi supporters clashed with security forces and political opponents on Sunday, with state media 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 Tahrir Square, cradle of the demonstrations that overthrew Mubarak.
On Thursday, one police and four army conscripts were killed in a car bomb attack in the Sinai, security sources said.
Brigadier Abdelnasser al-Adheb was quoted as telling state-run website al-Ahram that security forces had arrested "five terrorist elements" who were behind an attack at a state security building in South Sinai earlier this week in which three conscripts were killed.
The al Qaeda-linked group, Ansar Bayt al-Maqdis, claimed responsibility for that attack in an online statement, whose veracity could not be immediately authenticated.
(Additional reporting by Ayman Samir and Hadeel Al Shalchi in Cairo and Lesley Wroughton in Kuala Lumpur; Writing by Yara Bayoumy; Editing by Michael Georgy and David Stamp)