By Arshad Mohammed and Patricia Zengerle
WASHINGTON (Reuters) - The Obama administration sidestepped a decision on cutting off most of the annual $1.55 billion of U.S. aid to Egypt by saying on Thursday it does not plan to rule on whether a military coup took place in Egypt.
The stance resolves a dilemma for the White House: whether to comply with a U.S. law that requires eliminating most aid in the event of a military coup or to find that the armed forces' July 3 ouster of President Mohamed Mursi was not in fact a coup.
But the decision to refrain from a coup designation, which was conveyed to members of Congress in closed-door briefings, takes away an important point of leverage for Washington to push Egypt's generals toward new elections.
The question of whether a coup took place has vexed the White House. It wants to be seen as supporting democratically elected leaders, but Mursi was believed by U.S. officials to have ruled in an ineffective and autocratic manner.
Under U.S. law, most aid must stop to "any country whose duly elected head of government is deposed by military coup d'etat or decree" or toppled in "a coup d'etat or decree in which the military plays a decisive role."
But an Obama administration official said on condition of anonymity, "The law does not require us to make a formal determination as to whether a coup took place, and it is not in our national interest to make such a determination."
One way the White House may try to retain leverage is to negotiate with Congress to attach strings to future disbursement of military and economic aid to try to keep pressure on the Egyptian military.
The suspension earlier this week of the delivery of four F-16 fighters to Egypt is an example of how the United States could show its displeasure over the military's handling of the political transition or its treatment of street protesters.
EGYPT BRACES FOR FRIDAY RALLIES
A deeply polarized Egypt braced for bloodshed on Friday in rival mass rallies summoned by the army that ousted Mursi, who emerged from the Muslim Brotherhood to become Egypt's first freely elected president, and by the Islamists who back him.
Both sides warned of a decisive struggle for the future of the Arab world's most populous country, convulsed by political and economic turmoil since the 2011 uprising that ended 30 years of autocratic rule by Hosni Mubarak.
The U.S. decision not to take a position on whether Mursi was toppled in a military coup was laid out by Deputy Secretary of State William Burns in separate closed-door briefings for senior members of the Senate and the House of Representatives.
Speaking after the session with Burns, Senator Bob Corker, the top Republican on the Senate Foreign Relation Committee, said the Obama administration might never make a decision on the matter and suggested that U.S. law needed to be changed.
"No determination has been made. It's possible that no determination will ever be made," Corker told reporters.
The Egyptian armed forces deposed Mursi on July 3 after huge street protests against his rule, clearing the way for last week's installment of an interim Cabinet charged with restoring civilian government and reviving the economy.
Current and former officials have said the administration has no appetite for terminating aid, which runs at about $1.55 billion a year, $1.3 billion of which goes to the military, for fear of antagonizing one of Egypt's most important institutions.
Nor does it wish to increase instability in the most populous Arab nation, which is of strategic importance because of its peace treaty with close U.S. ally Israel and its control of the Suez Canal, a vital waterway for the U.S. military.
"Egypt is a very strategic country in the Middle East and what we need to be is an instrument of calmness," Corker told reporters, suggesting that the U.S. laws be changed so as to allow greater flexibility.
"We need to deal with our laws in such a way that allow us to continue to be that instrument of stability in the region," he added. "It's likely that very soon we will try to deal with this issue, which is a quandary, legislatively."
(Additional reporting by Matt Spetalnick; Editing by Peter Cooney)