CAIRO (Reuters) ? Egypt announced plans to develop a region bordering Israel on Monday after Israeli officials blamed its loosening grip on the area for the killing of eight Israelis by armed militants, inflaming tensions between the two neighbors.
Five Egyptian security personnel died when Israeli troops repelled the gunmen following the attack near Israel's Red Sea resort of Eilat on Thursday. Egypt said Israel's actions breached their 1979 peace treaty.
Israel said the gunmen had entered the country by crossing the Egyptian Sinai from Gaza.
Cairo has struggled to assert its grip on the isolated desert peninsula, especially after the overthrow of President Hosni Mubarak in February left a power vacuum that was quickly exploited by a local population resentful of the government in Cairo.
Israel expressed its regret for the Egyptian deaths and said it was investigating the incident, but pressure was growing in Egypt for sterner sanctions.
A group of politicians including former Arab League head Amr Moussa and other candidates for Egypt's presidency called for the return of the Egyptian ambassador from Israel, more troops in Sinai and trials for Israelis responsible for the killings.
"Egypt after the January revolution is not like Egypt before. The corrupt, oppressive and compliant regime is gone for good," they said in a statement published in newspapers.
They described Mubarak's government as "a strategic asset to Israel."
"It has been replaced by a strong popular will that does not know weakness or complicity and understands well how to achieve retribution for the blood of the martyrs."
Hundreds protested angrily outside the Israeli embassy in Cairo at the weekend. A protest of any size near the Israeli embassy would have been quickly smothered by state security forces in the Mubarak era.
The spat has highlighted the dilemma faced by the generals ruling Egypt, caught between pressure to preserve the 1979 peace treaty with Israel and popular hostility to the Jewish state.
The army is trying to keep a lid on social tension as Egypt prepares for elections later in the year as part of a promised transition to democratic civilian rule after Mubarak's removal.
CHANGING RELATIONSHIP?
The top army officers now in charge in Cairo have broken with Mubarak's softly-softly approach and Egypt's condemnation of Israel included a demand for a change in relations between the two U.S. allies.
But there were signs over the weekend that Egypt and Israel were both trying to ease the gravest crisis in their relations since Mubarak's overthrow.
Israeli officials have expressed "regret" for the incident but Egypt wants a full apology.
On Sunday evening Egypt's state media reported that Israeli President Shimon Peres had expressed his regrets over the Egyptian deaths in a phone call with the Egyptian ambassador to Tel Aviv, Yasser Reda.
Peres held a Ramadan dinner earlier on Sunday for senior Arab officials at his home in Jerusalem, where he told Egyptian diplomat Mustafa al-Kuni he had great respect for the Egyptian people, according to the Israeli Ynet news website.
The Egyptian state news agency said Peres had apologized to the Egyptian ambassador but that was not confirmed by Israel.
In a live interview with Israel's Channel 2 television on Monday, Israeli Defense Minister Ehud Barak said, "I did not apologize to Egypt." He said he had taken what he saw as a "necessary step" to ease tensions with Cairo and that Israel's investigation of the incident was not yet complete.
It was not clear whether Egypt had followed through on its decision to withdraw its ambassador from Israel.
The Palestinian Maan News said on Monday that the head of Egypt's military council Mohamed Hussein Tantawi had overruled a cabinet decision to recall the ambassador.
The Israeli military killed the leadership of the faction it said was responsible for the attack near Eilat in an air strike in Gaza on Thursday, and launched more than a dozen more raids on Friday. Medical officials say at least 15 Palestinians were killed, including five civilians, three of them children.
Israel said it was acting in self-defense and did not rule out further action to prevent the launch of rockets and missiles against Israeli cities.
But an official involved in negotiations between Israel and Palestinian factions said Hamas and Israel had agreed a ceasefire and Hamas would ensure that smaller militant groups also respected the truce.
RESTIVE SINAI
Egyptian forces were conducting a military operation to root out gunmen who had used the vacuum left by the country's political upheaval to attack pipelines supplying Israel and Jordan with gas.
But last week's shootings have prompted renewed debate on whether security can be restored in Sinai without development, which critics say Mubarak neglected.
Repeated arrests of local men and the inability of the local Bedouin to register and own land have bred resentment, stymied development and encouraged a vacuum of authority that analysts say is now being exploited by Islamist militant groups.
The cabinet approved the creation of a Supreme Authority for the Development of Sinai to boost investment and improve security. The authority would have a separate budget and would operate as an independent entity.
It will plan development projects and its head will report immediately to the prime minister.
The cabinet also called for steps to guarantee opportunities for the Bedouin, who have long complained of deliberate isolation by Cairo, including an employment quota.
The cabinet said it was working to ensure the Bedouin would also be able to own and build on land in the peninsula. The government also plans to open a university branch there.
The government repeated calls for a launch of the joint Israeli-Egyptian investigation into the border deaths and demanded a time-frame for its completion.
(Additional reporting by Yasmine Saleh in Cairo and Allyn Fisher-Ilan in Jerusalem, Writing by Tom Pfeiffer and Dina Zayed,Editing by Maria Golovnina and Andrew Roche)
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