By Justyna Pawlak
BRUSSELS (Reuters) - European Union governments will debate on Wednesday how to use their economic muscle to force Egypt's army-backed rulers to end a crackdown on deposed President Mohamed Mursi's Muslim Brotherhood.
There may be little they can do to inflict hardship on Cairo by cutting back on aid, because much of their cash goes to civil society groups, not the government, and Saudi Arabia has pledged to plug any shortfall if support is stopped.
But Europe's approach will be closely watched by all sides in Egypt's worst internal strife in its modern history, since the EU has emerged as a key mediator in the conflict.
The bloc's 28 governments are likely to tread carefully, mixing expressions of concern over bloodshed, with limited - if any - changes in the 5 billion euro ($6.7 billion) aid package Europe promised to Egypt last year, diplomats said.
"It is about finding a formula for Europe to help Egypt get from where it is now to where a vast majority of the people say they want to be," EU foreign policy chief Catherine Ashton told reporters on Tuesday, before the emergency meeting of EU foreign ministers in Brussels.
"That's going to be done by a political process and Egypt will need help to get there. And we are ready to help if they so wish," she said.
In July, Ashton became the first foreign official to meet Mursi after he was deposed by the army, taken into detention and placed under investigation on charges including murder.
The EU's subsequent mediation efforts, conducted jointly with the United States, collapsed earlier in August. Several days later, government forces killed hundreds of Mursi's supporters during a crackdown on protest camps.
Ashton has told Egyptian authorities she is willing to go back to mediate. The EU may not have much leverage over the Egyptian military but it can still talk to all sides, while all are suspicious of Washington.
Underlining unease in the West over how to respond to the crisis in Egypt, the White House said on Tuesday media reports that it had cut off aid to Egypt were inaccurate although the policy was under review.
In recent years, Washington has authorized about $1.3 billion in annual military aid and $250 million in economic assistance for Cairo.
The main dilemma facing the West is how to support democratic transformation in Egypt while ensuring stability in the Arab world's most populous nation.
In Europe, several governments have called for aid cutbacks.
Dutch Foreign Minister Frans Timmermans said in a letter to his country's parliament the deaths of about 900 people in Egypt should have "concrete consequences".
"The Netherlands wants the EU to consider cutting aid and conditions for resumption," he said.
Austria's Foreign Minister Michael Spindelegger told ORF television aid should be frozen "until democratic conditions are in place again".
But diplomats said some EU governments have questioned the wisdom of cutting support in meetings earlier this week.
The vast majority of funds provided to Egypt by EU institutions are directed to the civil society, while budget support has been stopped in 2012, meaning cutbacks could affect the population more than the government.
Other than aid, foreign ministers will discuss any military support provided by individual European governments to Egypt and, possibly, trade breaks included in a decade-old broad cooperation deal with Cairo. EU trade with Egypt runs at around 2 billion euros a month. ($1 = 0.7448 euros)
(Reporting by Justyna Pawlak; Editing by Andrew Heavens)