By Andrew Quinn
WASHINGTON (Reuters) - U.S. hopes for a quick end to its dispute with Egypt over pro-democracy groups have been dashed, stranding both countries in a dangerous limbo as pressures build on a security partnership that is vital to Washington.
The Obama administration had hoped the row over Egypt's raids on U.S.-funded groups and its travel bans on a handful of U.S. citizens would conclude this month with a face-saving deal that would release the Americans and put U.S. ties with Cairo back on track.
But an Egyptian court's decision on Sunday to adjourn the case until late April opened a risky new chapter in the dispute - leaving the door open to a solution, but also sharply raising the danger of permanent political damage on both sides.
"We are continuing to work hard to try to resolve this as soon as we can," State Department spokeswoman Victoria Nuland said on Monday. "We are concerned that this is not yet settled."
To drive home the point, Assistant Secretary of State Jeffrey Feltman summoned the Egyptian ambassador to the State Department, the latest in a series of high-level meetings including two last week between U.S. Secretary of State Hillary Clinton and her Egyptian counterpart.
U.S. officials have made clear that the $1.3 billion in annual military aid to Egypt has been put at risk by the case, in which 43 foreign and Egyptian non-governmental organization workers have been accused of receiving illegal foreign funds. They are also alleged to have carried out political activities unrelated to their work and failing to obtain necessary operating licenses.
If the case drags on, it could cause longer-term damage in U.S. relations with Egypt, which has been a pillar of Washington's alliances in the Arab world and, along with Jordan, is the only Arab country to have a peace treaty with Israel.
The diplomatic timing is also tricky. With Egyptian prosecution lawyers airing espionage accusations, the country gearing up for a presidential election before the end of June and the U.S. Congress already questioning continued aid to Egypt, many analysts say the case could veer even more wildly off track if it is not stopped in coming weeks.
"The chances that the United States and Egypt will have a breach over aid have gone up," said Robert Satloff, executive director of the Washington Institute for Near East Policy.
"What also seems obvious is that this case is going to continue, and may actually reach its climax in the midst of the Egyptian presidential election. The idea of a smooth, face-saving resolution seems to be retreating."
Clinton is expected to address the case when she testifies on Tuesday before a U.S. Senate committee.
A RISKY PAUSE
Supporters of the NGOs and some political analysts took heart from the adjournment of the case, pointing out that the court could have taken more aggressive action such as formally ordering the arrest of the accused.
By pausing the judicial proceedings, they argue, the court may allow more time for diplomacy to work.
"They just sort of punted here. They were clearly not ready to resolve it, but also not to escalate it further," said Michele Dunne, director of the Rafik Hariri Center for the Middle East at the Atlantic Council.
"But it seems as though a solution is not yet on the horizon, and I am starting to wonder whether the military-led government is capable of resolving it."
The NGO case has involved groups with high-level U.S. political connections.
The NGOs say they have long sought to register in Egypt, and describe the crackdown as part of a wave of repression against civil society activists by the generals who took power in Egypt after President Hosni Mubarak was overthrown last year.
Two of the groups involved, the National Democratic Institute (NDI) and the International Republican Institute (IRI), are loosely affiliated with the major U.S. political parties and one of the accused, IRI Egypt Director Sam LaHood, is the son of U.S. Transportation Secretary Ray LaHood.
The younger LaHood and several other American NGO staff members have taken refuge at the U.S. Embassy in Cairo - which could become another flashpoint if they are ever formally ordered to appear in court.
Charles Dunne, director of Middle East and North Africa programs at Freedom House, another NGO involved in the dispute, said the groups were determined to keep the focus on the broader question of democratization in Egypt, which Congress has made a condition for further U.S. aid.
"This isn't a war on American NGOs. This is a campaign against Egyptian civil society," said Dunne, himself among those charged in the case. He noted that the Obama administration would soon have to certify that Egypt is progressing toward democratic goals in order for U.S. aid to keep flowing.
"They will either have to certify, or waive certification for national security reasons. And doing either one of those now would cause an uproar," Dunne said.
U.S. officials have pledged to keep pressure the Egyptians in hopes that some sort of resolution can be found despite the rising sense of injury and outrage on both sides.
"The more that this is played out at the public, rhetorical level, the worse it will get," said Robert Danin, a Middle East expert at the Council on Foreign Relations.
"Whatever is going to happen next is going to happen behind closed doors. The more we hear about it, the less effective it is likely to be."