By Marwa Awad
CAIRO (Reuters) - Egypt said on Saturday it would withdraw its ambassador from Israel, insisting the killing of five Egyptian security personnel while Israeli forces pursued gunmen across the border was a breach of its 1979 peace treaty with the Jewish state.
Israeli Defense Minister Ehud Barak said Israel regretted the Egyptian deaths, which followed attacks in its border area that had killed eight people and sparked the most serious crisis in ties with Egypt since Hosni Mubarak's overthrow in February.
"We hope that the ambassador will not be recalled," said Yigal Palmor, an Israeli Foreign Ministry spokesman. "He's still here."
Egypt's Foreign Ministry later called in the Israeli charge d'affairs, delivered a protest and demanded a joint investigation into the deaths, the state MENA news agency said.
It said the Israeli diplomat told Egyptian officials he had been asked by his government to read Barak's statement at the Foreign Ministry. The agency said the charge d'affairs was summoned because the Israeli ambassador was not in Cairo.
The Egyptian cabinet decision followed a crisis meeting attended by army generals and intelligence chief Murad Muwafi.
Egypt "lays on Israel the political and legal responsibility for this incident, which constitutes a breach of the peace treaty between Egypt and Israel," the cabinet said in an official statement posted on its website.
"The cabinet committee has decided to withdraw the Egyptian ambassador in Israel until the result of investigations by the Israeli authorities is provided and an apology from the Israeli leadership over the hasty and regrettable statements about Egypt is given," the cabinet statement said.
The statement was later removed from the website, prompting speculation that Cairo may have retracted its decision. An Egyptian government spokesman said the cabinet stood by statements made by its information minister, but declined to make any reference to the recall of the ambassador, which was also reported by state media.
Barak expressed regret over the Egyptian deaths and said he had instructed the Israeli army to conduct a joint investigation with Egypt.
Israel pinned the blame for Thursday's border attack on a Gaza-based Palestinian faction, independent of Gaza's ruling Islamist Hamas, which it said had infiltrated Israel via Egypt's Sinai desert.
Israeli forces killed the faction's leadership in an air strike in Gaza on Thursday and launched more than a dozen more raids on Friday.
Palestinian militants fired at least 50 rockets at Israel from the Gaza Strip on Saturday. An Israeli man was killed and at least seven other people were injured by rockets.
Egypt's Foreign Minister Mohamed Kamel Amr said Egypt was "following with deep concern the escalation by the Israeli army against the Gaza Strip, in which innocent civilian casualties had fallen," and urged Israel to stop its operations.
The Cairo-based Arab League said it would hold an urgent meeting on Sunday to discuss Israeli air strikes on Gaza that killed 15 Palestinians.
Emad Gad, senior researcher at Cairo's Al-Ahram Center for Political and Strategic Studies, said neither Egypt nor Israel was keen to escalate the issue further. "Withdrawing the Egyptian ambassador is a good step but Egypt still has to insist on a formal apology from Israel," he said.
Hundreds of Egyptians protested onside the Israeli embassy in Cairo overnight, burning Israeli flags, tearing down metal barriers and demanding the expulsion of the Israeli envoy.
A senior Israeli defense official earlier said Israel was keen to maintain its peace treaty with Egypt, which it sees as a "fundamental element of existence" in the Middle East.
"One thing is sure, there is not a single person in Israel who wants to harm an Egyptian policeman or soldiers," Amos Gilad said on Israel Radio.
He said an investigation had not yet determined who killed the Egyptian security personnel.
Israeli Prime Minister Benjamin Netanyahu had been consulting cabinet ministers about a response, said an official who asked not to be named, referring to relations with Egypt.
Egypt has recalled its ambassador in Tel Aviv on previous occasions, including Israel's 1982 invasion of Lebanon and heavy Israeli shelling of the Gaza Strip in 2000.
Israel has expressed concern about security in the Sinai desert despite stepped-up efforts by Egyptian security to root out Islamist radicals.
Cairo rejected charges it had lost control of Sinai and said
Israel was blaming Egypt for its own security failings.
Egypt will take every precaution to secure its border with Israel to deter any infiltrators, and to respond to any Israeli military activity toward the Egyptian border, it added.
Sinai forms a buffer zone between the rest of Egypt and Israel. Parts of their mountainous border remain porous.
An official in Egypt's Suez Canal authority said the waterway was operating normally.
The number of troops Egypt can deploy in the Sinai is limited under the peace treaty signed with Israel in 1979 after the two countries had fought four wars since 1948.
In 1994 Jordan became the only other Arab country to sign a peace treaty with Israel.
(Additional reporting by Yasmine Saleh and Omar Fahmy in Cairo, Yusri Mohamed in Ismailia and Allyn Fisher-Ilan in Jerusalem; Editing by Sami Aboudi and Andrew Roche)