Egypt parliament set to meet, defying army

Responding a day after Mohamed Mursi's decree, the army on Monday defended its action to dissolve parliament and, in an apparent swipe at the president, said it was confident "all state institutions" would respect the constitution and the law.

The row, barely a week since Mursi took office, threatens new uncertainty for a nation whose economy is on the ropes and where many are anxious for an end to the political turmoil after 17 turbulent months since the fall of Hosni Mubarak.

Parliament speaker Saad al-Katatni, in remarks carried by the state news agency, said the lower house would sit from noon (1000 GMT) on Tuesday, in defiance of the army's order to dismiss parliament a month ago, a move based on a court ruling.

Katatni, like Mursi, hails from the Muslim Brotherhood, the long-time adversary of Mubarak and the other military men who ruled Egypt for six decades until June 30, when power was formally handed over to Mursi by the army council.

"Early confrontation," wrote Al-Akhbar newspaper, summing up Mursi's decision which could end a brief honeymoon with the military council, led by Field Marshal Hussein Tantawi.

Yet earlier in the day, Mursi and Tantawi showed no hint of discord when the president attended a military parade. Seated side-by-side, Mursi and Tantawi turned to each other in a brief jovial exchange, television images showed.

The military council which had run Egypt since Mubarak was toppled in February 2011 sought to trim the president's authority before the handover on June 30. It had dissolved parliament and taken legislative power for itself.

Mursi's decision hands those powers back to a parliament packed with his Islamist allies. He also ordered new elections for parliament - once a constitution is passed by referendum.

The dispute is part of a broader power struggle which could take years to play out, pitting long sidelined Islamists against the generals seeking to keep their privileges and status and a wider establishment still filled with Mubarak-era officials.

Responding to Mursi's challenge, the military council said in a statement read out on state television it had dissolved parliament based on ruling by the Supreme Constitutional Court, and had always acting to support "the will of the people."

It also said it "was confident all institutions of state will respect constitutional decrees", an apparent jibe at the Brotherhood president, and affirmed "the importance of the sovereignty of law and the constitution" to protect the state.

After a meeting over Mursi's decree, the supreme court said its decisions were final and binding, and said it would review cases challenging the decree's constitutionality on Tuesday.

PLAYING DOWN CONFRONTATION

As well as riling the army and judiciary, the move raises tensions between the Brotherhood, the biggest winners so far in Egypt's political transformation, and liberal and other groups concerned by what they see as an Islamist power grab.

The Egyptian Social Democratic Party, which has a handful of seats in parliament, condemned the president's recall of the assembly, saying it was a "violation of the judicial power" and resembled the high-handed approach long seen from the army.

About 1,000 people gathered in Cairo's prosperous Nasser City suburb to protest against Mursi's decision and call for parliament not to convene. The Brotherhood called on its website for a show of support for Mursi on the streets on Tuesday.

But the Brotherhood played down any dispute.

"We affirm that there is no confrontation with the judiciary and the decision respects the verdict of the constitutional court," said presidential aide Yasser Ali.

Katatni said parliament would discuss on Tuesday "how to implement the court ruling" that declared the assembly void and a legal committee would be asked to draw up proposals.

Some analysts said Mursi's decision to order early elections could offer a compromise by acknowledging the court's assertion that the election to the chamber breached some legal rules.

One European diplomatic source said recalling parliament gave Mursi leverage over the military, but could also placate Islamists who dominate the assembly so that Mursi would have a freer hand to pick a broader cabinet with non-Islamist members.

"The test will come when we see how the soldiers guarding the parliament building behave when MPs try to convene," the source said.

In a sign the generals may not challenge Mursi head on, the state news agency reported that guards at parliament had allowed some members into the building on Monday. It had been declared off limits when the army ordered the chamber dissolved.

The military council has less formal room for maneuver now that it has transferred presidential powers to Mursi, even if it has removed some powers from that office. He, however, is in a position that would have seemed unimaginably strong to the Brotherhood a year and half ago, when it was still banned and its members were being hounded by Mubarak.

ECONOMIC CRISIS

In one of his most high-profile meetings since taking office, Mursi met U.S. Deputy Secretary of State William Burns at the presidential palace on Sunday, signaling the new ties Washington is forging with resurgent Islamists in the region.

Burns pledged that the United States, which grants the Egyptian armed forces $1.3 billion a year in military aid, would support Egypt's economy, which has been hemorrhaging cash and is heading for a balance of payments and budget crisis.

Once a darling of emerging market fund managers, Egypt has watched foreign investors flee and its vital tourist trade has taken a big knock from the turmoil of the last year and a half.

Foreign reserves have plunged to about $15.5 billion, less than half their level before anti-Mubarak protests erupted, and the government has been forced to pay double-digit interest rates, seen as unsustainable, to fund its spending.

"Already domestic financing has reached a critical stage where you can't rely totally on the market anymore," said one Western diplomat. The government was running up payment arrears with energy suppliers and raising funds from the central bank, the diplomat noted - tactics sustainable only for a short time.

Adding to the murky outlook that is unsettling investors, legal wrangling looks set to continue. Following the judges' dissolution of parliament and scrapping of a constitutional drafting panel appointed by parliament, further challenges in the courts could yet derail a second drafting panel.

In addition to cases with the Supreme Constitutional Court, officials said about 20 suits against Mursi's decree had been presented to other courts. One of those was submitted by lawyer and leftist member of parliament Abul Ezz el-Hariry, who said it would be reviewed by an administrative court on Tuesday.