Fighting cuts access to Damascus airport, flights suspended

BEIRUT (Reuters) - Syrian rebels battled forces loyal to President Bashar al-Assad just outside Damascus on Thursday, cutting access to its international airport, and Dubai-based Emirates airline and EgyptAir stopped flights to the Syrian capital.

The Internet and some telephone lines went down across Syria. Rebels and the government traded blame for the blackout, the worst communications outage in 20 months of conflict.

Rebels fighting to topple Assad have been making gains around Syria by overrunning military bases and have been ramping up attacks on Damascus, his seat of power.

A rebel fighter who identified himself as Abu Omar, a member of the Jund Allah brigade, told Reuters that insurgents fired mortars at the airport's runways and were blocking the road linking it with the capital.

Speaking from the scene of the fighting, he said insurgents were not inside the airport but were able to block access to and from it.

A spokesman for a rebel Military Council in Damascus, Musaab Abu Qitada, said an artillery round was fired at a military site inside the airport and that fighting was now less than a kilometer (mile) away from the complex.

"We want to liberate the airport because of reports we see and our own information we have that shows civilian airplanes are being flown in here with weapons for the regime. It is our right to stop this," he told Reuters on Skype from Damascus.

U.S. and European officials said rebels were making gains in Syria, gradually eroding Assad's power, but said the fighting had not yet shifted decisively in their favor.

Two Austrian soldiers in a U.N. peacekeeping force deployed to monitor the frontier with the Israeli-occupied Golan Heights were wounded when their convoy came under fire near Damascus airport, Austria's defense ministry said. Syria state television said the soldiers were wounded by gunfire when rebels attacked an army position near the airport road.

The Information Ministry later said the highway to the airport was safe after security forces cleared it of "terrorists." Rebels said fighting in the area was continuing. The ministry said the airport was operating regularly, but there were no flights scheduled to land in the evening.

The accounts of fighting could not be verified immediately because of tight restrictions on media access to Syria.

But many airlines had already halted flights. Emirates suspended daily service to Damascus "until further notice." EgyptAir also said it was suspending all flights to Damascus because of "the deterioration of the security situation" there.

An EgyptAir flight that left at 1:30 p.m. (1130 GMT) landed in Damascus on schedule but the pilot was instructed to take off straight back to Egypt, airport sources in Cairo said.

INTERNET, PHONE LINES DOWN

Residents said the Internet in Damascus crashed in the early afternoon, and mobile and land telephone lines were functioning only intermittently.

A blog post on Renesys, a U.S. company which tracks Internet traffic worldwide, said that at 12:26 pm (1026 GMT), the entire country's Internet connectivity shut down completely.

The government has been accused of cutting communications in previous assaults on rebel-held areas in Syria. Syria's minister of information said "terrorists" were responsible for the Internet shutdown, while the telecommunications minister blamed what he said was a fault in the main communications network.

The past two weeks have seen rebels seizing a series of army bases across Syria, exposing Assad's loss of control in northern and eastern regions despite the devastating air power that he has used to bombard opposition strongholds, killing dozens of civilians as well. More than 40,000 people have been killed since the uprising began, according to opposition groups.

Rebels and activists said the fighting along the road to Damascus airport, southeast of the capital, was heavier in that area than at any other time in the conflict.

"PREPARING FOR MAJOR BATTLE"

Nabeel al-Ameer, from the rebel Military Council, said a large number of army reinforcements had arrived along the road after three days of scattered clashes ending with rebels seizing side streets to the north of it.

He said he hoped the proximity of the rebels to the airport would dissuade authorities from using it to import military equipment, but the priority now was to block the road.

There are several military airports around Damascus that remain under government control.

A Syrian security source told Reuters on condition of anonymity that the army had started a "cleansing operation" in the capital to confront rebel advances.

The source, who is from Assad's elite 4th Armoured Division, said one of the aims of the operation was to seal off the suburbs - where rebels are dominant - from the city center.

Assad is fighting an insurgency that grew out of peaceful demonstrations for democratic reform but has escalated, after a military crackdown on protesters, into a bloody civil war.

Syrian warplanes on Thursday bombed Kafr Souseh, Douma and Daraya, neighborhoods that fringe the center of the city where rebels have managed to hide out and ambush army units.

Activists said the areas were taking one of the heaviest poundings they had seen in months.

A senior European Union official said that Assad - whose family has held power in Syria for 42 years - might be preparing for a military showdown around Damascus by isolating the city with a network of checkpoints.

"The rebels are gaining ground but it is still rather slow. We are not witnessing the last days yet," the official said on condition of anonymity.

"On the outskirts of Damascus, there are mortars and more attacks. The regime is thinking of protecting itself ... with checkpoints in the next few days ... (It) seems the regime is preparing for major battle on Damascus."

A U.S. official said the rebels were "making important tactical gains that could eventually trigger a strategic shift in the conflict."

"They haven't reached that point yet, but the span of regime control is narrowing, and Assad's forces are having greater difficulty beating back the insurgents' progress," said the official, who also spoke on condition of anonymity.

Secretary of State Hillary Clinton echoed that view in remarks in a speech in Washington.

"I don't know that you can say that for the entire country it is yet at a tipping point, but it certainly seems that the regime will be much harder pressed in the next months," she said.

WARY BIG POWERS

Most foreign powers have condemned Assad but stopped short of arming rebel fighters as they fear heavy weapons could make their way into the hands of radical Islamist units, who have grown increasingly prominent in the insurgency.

Rebels decry their supporters for not providing them with surface-to-air missiles that they say they need to counter the air force. But recent looting of anti-aircraft missiles from army bases, as well as a slow stream of such weapons believed to be coming from Gulf Arab adversaries of Assad, has allowed them to shoot down some helicopters and jets.

U.S. Defense Secretary Leon Panetta told a Pentagon news conference the United States had not provided anti-aircraft missiles to the Syrian opposition, saying it was focused on nonlethal aid and humanitarian relief.

"Let me say unequivocally that we have not provided any of those kinds of missiles to the opposition forces located in Syria," he said.

Panetta and Israeli Defense Minister Ehud Barak both told the news conference they believed Assad would ultimately fall.

"It's criminal behavior on a global scale what he is doing to his own people, using jet fighters and helicopters and artillery and tanks, killing his own people," Barak said. "The whole world is watching and somehow it's not easy to mobilize enough sense of purpose and unity of action and political will to translate ... our feelings about what happens there into action to stop it."

Peter Bouckeart, emergencies director at Human Rights Watch, said the surface-to-air missiles used so far appeared to have been captured from the Syrian military and there was no evidence any of the ones used to date "have come from outside Syria."

He said the number of these missiles in rebel hands was probably over 20 but could rise significantly if rebels continue to capture military bases.

The relatively small number of anti-aircraft missiles looted so far means that many rebel-controlled areas of the country remain vulnerable to air strikes. The Observatory said 15 citizens, including children and women, were killed during a bombing in Aleppo's Ansari district on Thursday.

(Additional reporting by Dominic Evans and Erika Solomon in Beirut; Yasmine Saleh and Edmund Blair in Cairo, Praveen Menon in Dubai, Tabassum Zakaria and David Alexander in Washington, Tarmo Virki in helsinki and Justyna Pawlak in Brussels; Editing by Tom Pfeiffer and Cynthia Osterman)

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Opposition cries foul as Egypt constitution finalized

CAIRO (Reuters) - An Islamist-led assembly was expected to finalize a new constitution on Friday aimed at transforming Egypt and paving the way for an end to a crisis which erupted when President Mohamed Mursi gave himself sweeping new powers last week.

Mursi said his decree halting court challenges to his decisions, which provoked protests and violence from Egyptians fearing a new dictator was emerging less than two years after they ousted Hosni Mubarak, was "for an exceptional stage".

"It will end as soon as the people vote on a constitution," he told state television on Thursday night. "There is no place for dictatorship."

The assembly was expected to finish approving the draft constitution on Friday, allowing a referendum to be held as soon as mid-December on a text the Islamists say reflects Egypt's new freedoms.

Mursi's critics argue it is an attempt to rush through a draft they say has been hijacked by the Muslim Brotherhood, which backed Mursi for president in June elections, and its allies.

Two people have been killed and hundreds injured in the protests since last Thursday's decree, which deepened the divide between the newly-empowered Islamists and their opponents.

Setting the stage for more tension, the Muslim Brotherhood and its Islamist allies have called for pro-Mursi rallies on Saturday. But officials from the Brotherhood's party changed the venue and said they would avoid Tahrir Square, where a sit-in by the president's opponents entered an eighth day on Friday.

Seeking to calm protesters, Mursi said he welcomed opposition but it should not divide Egyptians and there was no place for violence. "I am very happy that Egypt has real political opposition," he said.

He stressed the need to attract investors and tourists to Egypt, where the crisis threatens to derail some early signs of an economic recovery after two years of turmoil. Egypt's benchmark stock index fell on Thursday to a 20-week-month low.

"MAY GOD BLESS US"

An alliance of Egyptian opposition groups pledged to keep up protests and said broader civil disobedience was possible to fight what it described as an attempt to "kidnap Egypt from its people".

Eleven Egyptian newspapers plan not to publish on Tuesday in protest at Mursi's decree, one reported. Al-Masry Al-Youm also said three privately owned satellite channels would not broadcast on Wednesday in protest.

The plebiscite is a gamble based on the Islamists' belief that they can mobilize voters again after winning all elections held since Mubarak was overthrown in February 2011.

"May God bless us on this day," Hossam el-Gheriyani, the speaker of the constituent assembly, told members at the start of the session to vote on each of the 234 articles in the draft, which will go to Mursi for approval and then to the plebiscite.

The legitimacy of the constitutional assembly has been called into question by a series of court cases demanding its dissolution. Its standing has also suffered from the withdrawal of members including church representatives of the Christian minority and liberals.

The Brotherhood argues that approval of the constitution in a referendum would bury all arguments about both the legality of the assembly and the text it has written in the last six months.

Mursi is expected to approve the adopted draft at the weekend. He must then call the referendum within 15 days. If Egyptians approve the constitution, legislative powers will pass straight from Mursi to the upper house of parliament, in line with an article in the new constitution, assembly members said.

The draft injects new Islamic references into Egypt's system of government but keeps in place an article defining "the principles of sharia" as the main source of legislation - the same phrase found in the previous constitution.

HISTORIC CHANGES

Among other historic changes to Egypt's system of government, it caps the amount of time a president can serve at two terms, or eight years. Mubarak ruled for three decades. It also introduces a measure of civilian oversight - not nearly enough for the critics - over the military establishment.

The president can declare war with parliament's approval, but only after consulting a national defense council with a heavy military and security membership, effectively giving the army a say. That element was not in the old constitution, used when Egypt was ruled by ex-military men.

Activists highlighted other flaws such as worrying articles pertaining to the rights of women and freedom of speech.

"There are some good pro-freedoms articles, but there are also catastrophic articles like one that prevents insults. This could be used against journalists criticizing the president or state officials," said human rights activist Gamal Eid.

"We wanted Egyptians to get more freedoms and less presidential powers and were unhappy with the end result in those areas," said Edward Ghaleb, who had been sitting on the assembly as a representative of the Coptic Orthodox church.

New parliamentary elections cannot happen until the constitution is passed. Egypt has been without an elected legislature since the Islamist-dominated lower house was dissolved in June.

"The secular forces and the church and the judges are not happy with the constitution; the journalists are not happy, so I think this will increase tensions in the country," said Mustapha Kamal Al-Sayyid, a professor of political science at Cairo University. "I don't know how the referendum can be organized if the judges are upset," he added.

Egyptian elections are overseen by the judiciary.

The decree issued by Mursi worsened already tetchy relations with judges, many of whom saw it as a threat to their independence. Two courts declared a strike on Wednesday.

(Additional reporting by Tom Perry, Tamim Elyan, Patrick Werr, Edmund Blair and Ali Abdelatti; Editing by Philippa Fletcher)

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Analysis: The next stop for Palestinians could be global courts

(Reuters) - The U.N. General Assembly's overwhelming vote to recognize Palestine as a non-member state offers little prospect for greater clout in world politics but it could make a difference in the international courts.

The formal recognition of statehood, even without full U.N. membership, could be enough for the Palestinians to achieve membership at the Hague-based International Criminal Court (ICC), where member states have the power to refer for investigation alleged war crimes or crimes against humanity.

With its upgraded status at the U.N., the Palestinians may now seek to apply to the ICC for membership and authority to file war-crimes charges against the Israeli government and its officials.

That threat of so-called "lawfare" has already prevented some Israeli civilian and military leaders from traveling abroad out of fear they'd be arrested as war criminals.

"Israelis are afraid of being hauled to The Hague," said Robert Malley, the Middle East program director for the International Crisis Group.

The Palestinians have long planned to use non-membership statehood at the U.N., once obtained, as a way to enter the ICC. One Palestinian negotiator, in talking to the International Crisis Group, called the strategy a "legal or diplomatic intifada" against Israel.

When Palestinian Authority President Mahmoud Abbas addressed the United Nations in September he specifically accused Israel of committing war crimes.

Israeli officials have said the country's armed forces strictly adhere to international law and argue the true aim of Palestinians' accusations is to isolate Israel.

Last spring, the ICC's former chief prosecutor turned down a 2009 Palestinian request for prosecution of Israel's actions in the 2008-2009 Gaza war with Hamas, specifically noting that Palestine was only a U.N. observer entity.

In September, the new ICC prosecutor, Fatou Bensouda, said a General Assembly vote could make the difference.

"What we have also done is to leave the door open and to say that if this -- if Palestine is able to pass over that (statehood) hurdle, of course, under the General Assembly, then we will revisit what the ICC can do," Bensouda said during a talk in New York.

The Hague-based ICC is the one international venue where individuals can be criminally charged. All 117 countries that ratified the Rome Statute, which created the court, are bound to turn over suspects.

The United States and Israel have not joined the Rome Statute, but that would not prevent the Palestinians from pursing cases under the treaty. ICC arrest warrants and rulings carry geopolitical weight even when they can't be enforced. An indictment of Libya's Moammar Gadhafi last year helped mobilize international support for the rebels who opposed him.

Of course, if the Palestinians enter the legal battlefield, they, too, risk being accused and prosecuted in the venues where they'd try to target Israelis.

There is no guarantee for either side that the ICC prosecutor would follow through on charges. The ICC has procedural obstacles that could head off any prosecution there.

Some commentators argue that, like lawyers in any legal fight, both the Palestinians and Israelis have exaggerated the stakes in what's more of a political and public-relations drama.

"The concern that something dramatic would change is overblown," said Rosa Brooks, a professor of international law at Georgetown University who has also served in policy roles at the State and Defense departments.

And it's important to remember that the ICC is a political organization as much as a legal one -- cases are initiated by member governments and the U.N. Security Council -- so geopolitical considerations can trump a strictly legal case.

(Reporting by Joseph Schuman; Editing by Eileen Daspin and Lisa Shumaker)

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Palestinians win de facto U.N. recognition of sovereign state

UNITED NATIONS (Reuters) - The 193-nation U.N. General Assembly on Thursday overwhelmingly approved the de facto recognition of the sovereign state of Palestine after Palestinian President Mahmoud Abbas called on the world body to issue its long overdue "birth certificate."

The U.N. victory for the Palestinians was a diplomatic setback for the United States and Israel, which were joined by only a handful of countries in voting against the move to upgrade the Palestinian Authority's observer status at the United Nations to "non-member state" from "entity," like the Vatican.

Britain called on the United States to use its influence to help break the long impasse in Israeli-Palestinian peace talks. Washington also called for a revival of direct negotiations.

There were 138 votes in favor, nine against and 41 abstentions. Three countries did not take part in the vote, held on the 65th anniversary of the adoption of U.N. resolution 181 that partitioned Palestine into separate Jewish and Arab states.

Thousands of flag-waving Palestinians in the West Bank and the Gaza Strip set off fireworks and danced in the streets to celebrate the vote.

The assembly approved the upgrade despite threats by the United States and Israel to punish the Palestinians by withholding funds for the West Bank government. U.N. envoys said Israel might not retaliate harshly against the Palestinians over the vote as long as they do not seek to join the International Criminal Court.

If the Palestinians were to join the ICC, they could file complaints with the court accusing Israel of war crimes, crimes against humanity and other serious crimes.

U.S. Secretary of State Hillary Clinton called the vote "unfortunate and counterproductive," while the Vatican praised the move and called for an internationally guaranteed special status for Jerusalem, something bound to irritate Israel.

The much-anticipated vote came after Abbas denounced Israel for its "aggressive policies and the perpetration of war crimes" from the U.N. podium, remarks that elicited a furious response from the Jewish state.

"Sixty-five years ago on this day, the United Nations General Assembly adopted resolution 181, which partitioned the land of historic Palestine into two states and became the birth certificate for Israel," Abbas told the assembly after receiving a standing ovation.

"The General Assembly is called upon today to issue a birth certificate of the reality of the State of Palestine," he said.

Israeli Prime Minister Benjamin Netanyahu responded quickly, condemning Abbas' critique of Israel as "hostile and poisonous," and full of "false propaganda.

"These are not the words of a man who wants peace," Netanyahu said in a statement released by his office. He reiterated Israeli calls for direct talks with the Palestinians, dismissing Thursday's resolution as "meaningless."

ICC THREAT

Granting Palestinians the title of "non-member observer state" falls short of full U.N. membership - something the Palestinians failed to achieve last year. But it would allow them access to the ICC and other international bodies, should they choose to join them.

Abbas did not mention the ICC in his speech. But Palestinian Foreign Minister Riyad al-Maliki told reporters after the vote that if Israel continued to build illegal settlements, the Palestinians might pursue the ICC route.

"As long as the Israelis are not committing atrocities, are not building settlements, are not violating international law, then we don't see any reason to go anywhere," he said.

"If the Israelis continue with such policy - aggression, settlements, assassinations, attacks, confiscations, building walls - violating international law, then we have no other remedy but really to knock those to other places," Maliki said.

In Washington, a group of four Republican and Democratic senators announced legislation that would close the Palestinian office in Washington unless the Palestinians enter "meaningful negotiations" with Israel, and eliminate all U.S. assistance to the Palestinian Authority if it turns to the ICC.

"I fear the Palestinian Authority will now be able to use the United Nations as a political club against Israel," said Republican Senator Lindsey Graham, one of the sponsors.

Abbas led the campaign to win support for the resolution, which followed an eight-day conflict this month between Israel and Islamists in the Gaza Strip, who are pledged to Israel's destruction and oppose a negotiated peace.

At least 17 European nations voted in favor of the Palestinian resolution, including Austria, France, Italy, Norway and Spain. Abbas had focused his lobbying efforts on Europe, which supplies much of the aid the Palestinian Authority relies on. Britain, Germany and others chose to abstain.

The Czech Republic was unique in Europe, joining the United States, Israel, Canada, Panama and tiny Pacific Island states likes Nauru, Palau and Micronesia in voting against the move.

PALESTINIANS RALLY

Peace talks have been stalled for two years, mainly over Israeli settlements in the West Bank, which have expanded despite being deemed illegal by most of the world. There are 4.3 million Palestinians in the West Bank and Gaza.

After the vote, U.S. Ambassador to the United Nations Susan Rice called for the immediate resumption of peace talks.

"The Palestinian people will wake up tomorrow and find that little about their lives has changed save that the prospects of a durable peace have only receded," she said.

She added that both parties should "avoid any further provocative actions in the region, in New York or elsewhere."

Palestinian Prime Minister Salam Fayyad said he hoped all sides would use the vote to push for new breakthroughs in the peace process.

"I hope there will be no punitive measures," Fayyad told Reuters in Washington, where he was attending a conference.

"I hope that some reason will prevail and the opportunity will be taken to take advantage of what happened today in favor of getting a political process moving," he said.

Britain's U.N. ambassador, Mark Lyall Grant, told reporters it was time for recently re-elected U.S. President Barack Obama to make a new push for peace.

"We believe the window for the two-state solution is closing," he said. "That is why we are encouraging the United States and other key international actors to grasp this opportunity and use the next 12 months as a way to really break through this impasse."

(Additional reporting by Andrew Quinn in Washington, Noah Browning in Ramallah, Jeffrey Heller in Jerusalem, Robert Mueller in Prague, Gabriela Baczynska and Reuters bureaux in Europe and elsewhere; Editing by Peter Cooney and Eric Beech)

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U.S. gives Iran until March to cooperate with IAEA

VIENNA (Reuters) - The United States set a March deadline on Thursday for Iran to start cooperating in substance with a U.N. nuclear agency investigation, warning Tehran the issue may otherwise be referred to the U.N. Security Council.

The comments by U.S. diplomat Robert Wood to the board of the International Atomic Energy Agency signaled Washington's growing frustration at a lack of progress in the IAEA's inquiry into possible military dimensions to Tehran's nuclear program.

Iran - which was first reported to the U.N. Security Council over its nuclear program by the IAEA's 35-nation board in 2006 and then was hit by U.N. sanctions - rejects suspicions it is on a covert quest for atomic bomb capability.

But its refusal to curb nuclear work with both civilian and military applications, and its lack of openness with the IAEA, have drawn tough Western punitive measures and a threat of pre-emptive military strikes by Israel.

A year ago, the IAEA published a report with a trove of intelligence indicating past, and some possibly continuing, research in Iran that could be relevant for nuclear weapons.

The IAEA has since tried to gain access to Iranian sites, officials and documents it says it needs for the inquiry, but so far without any concrete results in a series of meetings with Iran since January. The two sides will meet again in December.

In his statement, Wood requested IAEA Director-General Yukiya Amano to say in his next quarterly report on Iran, likely due in late February, whether Tehran has taken "any substantive steps" to address the agency's concerns.

"If by March Iran has not begun substantive cooperation with the IAEA, the United States will work with other board members to pursue appropriate board action, and would urge the board to consider reporting this lack of progress to the U.N. Security Council," Wood said, according to a copy of his statement.

"Iran cannot be allowed to indefinitely ignore its obligations ... Iran must act now, in substance," Wood said.

Amano earlier told the board that there had been no progress in his agency's year-long push to clarify concerns about suspected atom bomb research in Iran, but said he would continue his efforts.

EU SEES IRANIAN "PROCRASTINATION"

A simple majority in the IAEA board would be required to refer an issue to the U.N. Security Council, which has imposed four sanctions resolutions on Iran since 2006.

It is unclear whether Russia and China - which have criticized unilateral Western sanctions on Iran - would back any U.S. initiative to report Iran again to the Security Council.

Wood later told reporters he hoped the December talks between the IAEA and Iran would be fruitful. But, he added, "I have my doubts about the sincerity of Iran."

The 27-nation European Union told the board that Iran's "procrastination" was unacceptable. "Iran must act now, in a substantive way, to address the serious and continuing international concerns on its nuclear program," it said.

Iran's ambassador to the IAEA, Ali Asghar Soltanieh, criticised what he called "political noise" and "pressure" from the United States and the EU.

Diplomacy between Iran and the powers - the United States, China, Russia, France, Germany, and Britain - has been deadlocked since a June meeting that ended without success.

Both sides now say they want to resume talks soon, after the re-election of U.S. President Barack Obama, and diplomats expect a new meeting in Istanbul in December or January.

Iran is ready for a "face-saving" negotiated solution to the nuclear dispute, but the West must accept the reality that Tehran would never suspend uranium enrichment, Soltanieh said.

Refined uranium can be used to fuel nuclear energy plants, Iran's stated aim, and also provide bomb material if processed further, which the West suspects is Iran's ultimate aim.

The West wants Iran to suspend enrichment, but Iran is showing no sign of backing down.

Iran "has provocatively snubbed the international community by expanding its enrichment capacity in defiance of multiple United Nations Security Council resolutions," Wood said.

(Editing by Mark Heinrich)

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Egypt assembly seeks to wrap up constitution

CAIRO (Reuters) - The assembly writing Egypt's constitution said it could wrap up a final draft later on Wednesday, a move the Muslim Brotherhood sees as a way out of a crisis over a decree by President Mohamed Mursi that protesters say gives him dictatorial powers.

But as Mursi's opponents staged a sixth day of protests in Tahrir Square, critics said the Islamist-dominated assembly's bid to finish the constitution quickly could make matters worse.

Two people have been killed and hundreds injured in countrywide protest set off by Mursi's decree.

The Brotherhood hopes to end the crisis by replacing Mursi's controversial decree with an entirely new constitution that would need to be approved in a popular referendum, a Brotherhood official told Reuters.

It is a gamble based on the Islamists' belief that they can mobilize enough voters to win the referendum: they have won all elections held since Hosni Mubarak was toppled from power.

But the move seemed likely to deepen divisions that are being exposed in the street.

The Muslim Brotherhood and its Islamist allies called for protests on Saturday in Tahrir Square, setting the stage for more confrontation with their opponents, who staged a mass rally there on Tuesday.

The constitution is one of the main reasons Mursi is at loggerheads with non-Islamist opponents. They are boycotting the 100-member constitutional assembly, saying the Islamists have tried to impose their vision for Egypt's future.

The assembly's legal legitimacy has been called into question by a series of court cases demanding its dissolution. Its popular legitimacy has been hit by the withdrawal of members including church representatives and liberals.

"We will start now and finish today, God willing," Hossam el-Gheriyani, the assembly speaker, said at the start of its latest session in Cairo, saying Thursday would be "a great day".

"If you are upset by the decree, nothing will stop it except a new constitution issued immediately," he said. Three other members of the assembly told Reuters there were plans to put the document to a vote on Thursday.

ENTRENCHING AUTHORITARIANISM

Just down the road from the meeting convened at the Shura Council, protesters were again clashing with riot police in Tahrir Square. Members of the assembly watched on television as they waited to go into session.

"The constitution is in its last phases and will be put to a referendum soon and God willing it will solve a lot of the problems in the street," said Talaat Marzouk, an assembly member from the Salafi Nour Party, as he watched the images.

But Wael Ghonim, a prominent activist whose online blogging helped ignite the anti-Mubarak uprising, said a constitution passed in such circumstances would "entrench authoritarianism".

The constitution is supposed to be the cornerstone of a new, democratic Egypt following Mubarak's three decades of autocratic rule. The assembly has been at work for six months. Mursi had extended its December 12 deadline by two months - extra time that Gheriyani said was not needed.

The constitution will determine the powers of the president and parliament and define the roles of the judiciary and a military establishment that had been at the heart of power for decades until Mubarak was toppled. It will also set out the role of Islamic law, or sharia.

The effort to conclude the text quickly marked an escalation, said Nathan Brown, a professor of political science at George Washington University in the United States.

"It may be regarded with hostility by a lot of state actors too, including the judiciary," he said.

Leading opposition and former Arab League chief figure Amr Moussa slammed the move. He walked out of the assembly earlier this month. "This is nonsensical and one of the steps that shouldn't be taken, given the background of anger and resentment to the current constitutional assembly," he told Reuters.

Once drafted, the constitution will go to Mursi for approval, and he must then put it to a referendum within 15 days, which could mean the vote would be held by mid-December.

COURTS DECLARE STRIKE

Deepening the crisis further on Wednesday, Egypt's Cassation and Appeals courts said they would suspend their work until the constitutional court rules on the decree.

The judiciary, largely unreformed since the popular uprising that unseated Mubarak, was seen as a major target in the decree issued last Thursday, which extended his powers and put his decisions temporarily beyond legal challenge.

"The president wants to create a new dictatorship," said 38-year-old Mohamed Sayyed Ahmed, an unemployed man, in Tahrir.

Showing the depth of distrust of Mursi in parts of the judiciary, a spokesman for the Supreme Constitutional Court, which earlier this year declared void the Islamist-led parliament, said it felt under attack by the president.

In a speech on Friday, Mursi praised the judiciary as a whole but referred to corrupt elements he aimed to weed out.

"The really sad thing that has pained the members of this court is when the president of the republic joined, in a painful surprise, the campaign of continuous attack on the Constitutional Court," said the spokesman Maher Samy.

Senior judges have been negotiating with Mursi about how to restrict his new powers.

Mursi's administration insists that his actions were aimed at breaking a political logjam to push Egypt more swiftly towards democracy, an assertion his opponents dismiss.

The West worries about turbulence in a nation that has a peace treaty with Israel and is now ruled by Islamists they long kept at arms length.

Trying to ease tensions with judges, Mursi said elements of his decree giving his decisions immunity applied only to matters of "sovereign" importance, a compromise suggested by the judges.

A constitution must be in place before a new parliament can be elected, and until that time Mursi holds both executive and legislative powers. An election could take place in early 2013.

(Additional reporting by Tom Perry and Marwa Awad; Writing by Edmund Blair and Tom Perry; Editing by Will Waterman and Giles Elgood)

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Bangladesh fire protests rage, supervisors arrested

DHAKA/CHICAGO (Reuters) - Three supervisors of a Bangladeshi garment factory were arrested on Wednesday as protests over a suspected arson fire that killed more than 100 people raged on into a third day, with textile workers and police clashing in the streets of a Dhaka suburb.

The government has blamed last weekend's disaster, the country's worst-ever industrial blaze, on saboteurs and police said they had arrested two people, who were seen on CCTV footage trying to set fire to stockpiles of material in another factory.

The fire at Tazreen Fashions has put a spotlight on global retailers that source clothes from Bangladesh, where wage costs are low - as little as $37 a month for some workers. Rights groups have called on Western firms to sign on to a safety program in that country, the world's second-biggest clothes exporter.

Wal-Mart Stores Inc, the world's largest retailer, said one of its suppliers subcontracted work to the now burned-out factory without authorization and would no longer be used. But one of the most senior figures in the country's garment industry cast doubt on that claim.

"I won't believe Walmart entirely if they say they did not know of this at all. That is because even if I am subcontracted for a Walmart deal, those subcontracted factories still need to be certified by Walmart," Annisul Huq, former president of the Bangladesh Garment Manufacturers and Exporters Association, told Reuters following a meeting of association members.

"You can skirt rules for one or two odd times if it is for a very small quantity, but no decent quantity of work can be done without the client's knowledge and permission," he said.

Wal-Mart, in a statement, reiterated that while it does have an audit and notification system in place, in this case a supplier subcontracted to the workshop without approval.

MOST FACTORIES CLOSED

Witnesses said that at least 20 people were injured on Wednesday in the capital's industrial suburb of Ashulia as police pushed back protesters demanding safer factories and punishment for those responsible for the blaze, which killed 111 workers and injured more than 150.

Thousands of workers poured out onto the roads, blocking traffic, as the authorities closed most of the 300 garment factories in the area. They were driven back by riot police using tear gas and batons.

Three employees of Tazreen Fashions - an administrative officer, a store manager and a security supervisor - were arrested and paraded in front of the media.

Dhaka District Police Chief Habibur Rahman told Reuters they would be investigated for suspected negligence.

He said police were investigating complaints from some survivors that factory managers had stopped workers from leaving the multi-story building after a fire alarm went off.

Representatives of the Tazreen Fashions factory, including the owner, were not available for comment.

CCTV SHOWS APPARENT ARSON ATTEMPT

The country's interior minister, Mohiuddin Khan Alamgir, has blamed saboteurs for the fire.

Adding to the case for arson, a news channel aired CCTV footage showing two employees of another factory in the Ashulia area trying to set fire to stockpiles of material.

Police chief Rahman said a woman and a man, who were identified from the video, had been taken into custody.

The TV clip shows a lone woman wearing a mauve head scarf and traditional loose garment passing through a room with clothes piled neatly in various places on a table. She briefly disappears from view beneath the table and then is shown again walking through the room and out of camera range.

Smoke soon begins to billow, first slowly then more rapidly, from the spot where the woman was seen ducking under the table.

Workers come running in and try to douse the flames by various means. The woman in the mauve scarf reenters the room and is seen helping workers in their efforts to put out the blaze.

Two other incidents in the outskirts of Dhaka - a fire at a factory on Monday morning and an explosion and fire at a facility on Tuesday evening - have raised concerns among manufacturing leaders that the industry may be under attack.

Talk of sabotage has also spread fear.

At least 50 garment workers were injured in a stampede as they tried to flee from their factory after a faulty generator caught fire in the city of Chittagong, the fire service said. Factory workers quickly put out the flames.

Bangladesh has about 4,500 garment factories and is the world's biggest exporter of clothing after China, with garments making up 80 percent of its $24 billion annual exports.

Working conditions in Bangladeshi factories are notoriously poor, with little enforcement of safety laws. Overcrowding and locked fire doors are not uncommon.

More than 300 factories near Dhaka were shut for almost a week earlier this year as workers demanded higher wages and better conditions. At least 500 have died in garment factory accidents in Bangladesh since 2006, according to fire brigade officials.

(Additional reporting by Jessica Wohl in Chicago; Writing by John Chalmers and Ben Berkowitz; Editing by Robert Birsel and Gunna Dickson)

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Strong European support for Palestinian statehood move

UNITED NATIONS (Reuters) - A Palestinian bid for indirect U.N. recognition of statehood received vows of support from more than a dozen European nations as of Wednesday, and diplomats said this backing may deter Israel from harsh retaliation against the Palestinian Authority for seeking to upgrade its U.N. status.

A Palestinian resolution on Thursday that would change its U.N. observer status from an "entity" to a "non-member state," implicitly recognizing the sovereign state of Palestine, is expected to pass easily in the 193-nation U.N. General Assembly. But Israel, the United States and a handful of other members of are expected to vote against it.

Palestinian President Mahmoud Abbas has been leading the campaign to win support for the resolution, and some European governments have offered him their support after an eight-day conflict this month between Israel and Islamists in the Gaza Strip, who are pledged to Israel's destruction and oppose his efforts towards a negotiated peace.

The U.S. State Department said Deputy Secretary of State Bill Burns and U.S. Mideast peace envoy David Hale traveled to New York on Wednesday in a last-ditch effort to get Abbas to reconsider.

"We've been clear, we've been consistent with the Palestinians, that we oppose observer state status in the General Assembly and this resolution," State Department spokeswoman Victoria Nuland said.

She repeated U.S. warnings that the move could hit U.S. economic support for the Palestinians. The Israelis have also warned that they might take deductions out of monthly transfers of duties that Israel collects on the Palestinians' behalf.

The United States and Israel say the only genuine route to statehood is at the negotiating table, through a peace accord hammered out in direct talks with Israel.

Granting Palestinians the title of "non-member observer state" falls short of full U.N. membership - something the Palestinians tried but failed to achieve last year. But it would allow them access to the International Criminal Court and some other international bodies, should they choose to join them. The Vatican numbers among the U.N.'s non-member states.

Hanan Ashrawi, a top Palestinian Liberation Organization (PLO) official, told a news conference in Ramallah that "the Palestinians can't be blackmailed all the time with money."

"Some rights aren't for sale," Ashrawi said. "If Israel wants to destabilize the whole region, it can. We are talking to the Arab World about their support if Israel responds with financial measures, and the EU has indicated they will not stop their support to us."

ISRAELI RETALIATION MIGHT BE MODERATE

As there is little doubt about how the United States will vote when the Palestinian resolution to upgrade its U.N. status is put to a vote sometime after 3 p.m. EST (2000 GMT) on Thursday, the Palestinian Authority has been concentrating its efforts on lobbying wealthy European states, diplomats say.

With strong support from the developing world that make up the majority of U.N. members, the Palestinian resolution is virtually assured of securing more than the requisite simple majority. But Abbas has been trying to amass as many European yes votes as possible.

"A strong showing in Europe will emphasize to Israel and the United States that the Palestinian Authority is widely seen legitimate," a Western envoy said on condition of anonymity. "It may also give Israel second thoughts about trying to bankrupt the Palestinians for something that is really symbolic."

One senior Western diplomat predicted that at least 120-130 countries would vote for the Palestinian resolution.

As of Wednesday afternoon Austria, Denmark, Norway, Finland, France, Greece, Iceland, Ireland, Luxembourg, Malta, Portugal, Spain and Switzerland had all pledged to support the Palestinian resolution. Britain said it was prepared to vote yes, but only if the Palestinians fulfilled certain conditions.

Ashrawi said the positive responses from European states were encouraging and sent a message of hope to all Palestinians.

"This constitutes a historical turning point and opportunity for the world to rectify a grave historical injustice that the Palestinians have undergone since the creation of the state of Israel in 1948," she said.

A strong backing from European nations could make it awkward for Israel to implement harsh retaliatory measures. Diplomats say that Israel seems hesitant to take strong action against Abbas as it would antagonize Western European countries.

But Israel's reaction might not be so measured if the Palestinians seek ICC action against Israel on charges of war crimes, crimes against humanity or other crimes the court would have jurisdiction over.

It also seems wary of weakening the Western-backed Abbas, especially after the political boost rival Hamas received from recent solidarity visits to Gaza by top officials from Egypt, Qatar and Tunisia.

Hamas militants, who control Gaza and have had icy relations with the Palestinian Authority in the West Bank, unexpectedly offered Abbas their support earlier this week.

STALLED PEACE TALKS

No European nations announced they would vote against the non-member state move, though several U.N. diplomats said privately that the Czech Republic and Netherlands might be among those that cast no votes. Neither has announced an official position.

Germany said it could not support the Palestinian move though it was not clear if it would abstain, like Estonia and Lithuania, or vote against it.

Europe's undecided countries included European Union members Belgium, Bulgaria, Hungary, Italy, Latvia, Poland, Romania, Slovakia and Sweden. Several EU members said they were hoping the 27-nation EU would reach a common position on the Palestinian move, though U.N. diplomats said that EU unity was an impossibility.

Peace talks have been stalled for two years, mainly over the issue of Israeli settlements in the West Bank, which have expanded despite being deemed illegal by most of the world.

In their draft resolution, the Palestinians have pledged to relaunch the peace process immediately following the U.N. vote.

Britain said it would be willing to support the Palestinian move on Thursday if two conditions were met.

"The first is that the Palestinian Authority should indicate a clear commitment to return immediately to negotiations without preconditions," Foreign Seretary William Hague told parliament.

"The second assurance relates to membership of other specialized U.N. agencies and action in the International Criminal Court," he added.

Rights groups said that stance contradicted Britain's stated commitment to accountability for serious crimes.

Israel and the United States have mooted withholding aid and tax revenue that the Palestinian government in the West Bank needs to survive. Israeli Foreign Minister Avigdor Lieberman has also viewed options that include bringing down Abbas.

(Additional reporting by Mohammed Abbas in London, Noah Browning in Ramallah, Jeffrey Heller in Jerusalem, Michelle Nichols in New York, and Reuters bureau in Europe and elsewhere; Editing by Tom Pfeiffer and Cynthia Osterman)

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Japan's new Restoration Party seeks bigger defense spending

TOKYO (Reuters) - A new Japanese party that hopes to become a force to contend with in a December 16 general election is calling for more defense spending to protect national interests and lower corporate and income taxes to bolster the economy, domestic media said on Thursday.

The Japan Restoration Party, which came in second to the main opposition Liberal Democrats in an opinion poll published on Thursday, also wants to shrink the role of the central government while promoting free-market competition and making it easier to revise Japan's pacifist constitution.

The party's platform, to be unveiled later on Thursday, calls for breaking through a decades-old unofficial cap that limited defense spending to 1 percent of gross domestic product and boosting maritime surveillance, the Yomiuri newspaper said. The moves that could further strain ties with China, already frayed by a feud over islands in the East China Sea.

About 15 percent of voters surveyed by the Nikkei business daily plan to vote for the Japan Restoration Party, outstripping the ruling Democratic Party of Japan's (DPJ) 13 percent but lagging behind the Liberal Democratic Party (LDP) at 23 percent.

Echoing LDP pledges of aggressive monetary easing to fight deflation, the Restoration Party wants to revise a law governing the Bank of Japan law - a move critics worry would lessen central bank independence.

The party, which had dropped its anti-nuclear stance after its founder, popular Osaka Mayor Toru Hashimoto decided to merge with a tiny pro-nuclear party led by the former governor of Tokyo, Shintaro Ishihara, will promise to "phase out" existing reactors by the 2030s to reduce reliance on nuclear power.

Public opposition to nuclear power in Japan has increased since the Fukushima radiation crisis last year, the world's worst in a quarter century.

(Reporting by Antoni Slodkowski; Editing by Linda Sieg)

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Chinese police plan to board vessels in disputed seas

BEIJING (Reuters) - Police in the southern Chinese island province of Hainan will board and search ships which enter into what China considers its territorial waters in the disputed South China Sea, state media said on Thursday, a move which could raise tensions further.

The South China Sea is Asia's biggest potential military trouble spot with several Asian countries claiming sovereignty.

New rules, which come into effect on January 1, will allow Hainan police to board and seize control of foreign ships which "illegally enter" Chinese waters and order them to change course or stop sailing, the official China Daily reported.

"Activities such as entering the island province's waters without permission, damaging coastal defense facilities and engaging in publicity that threatens national security are illegal," the English-language newspaper said.

"If foreign ships or crew members violate regulations, Hainan police have the right to take over the ships or their communication systems, under the revised regulations," it added.

China's assertion of sovereignty over the stretch of water off its south coast and to the east of mainland Southeast Asia has set it directly against Vietnam and the Philippines, while Brunei, Taiwan and Malaysia also lay claim to parts.

China occasionally detains fishermen, mostly from Vietnam, who it accuses of operating illegally in Chinese waters, though generally frees them quite quickly.

Hainan, which likes to style itself as China's answer to Hawaii or Bali with its resorts and beaches, is the province responsible for administering the country's extensive claims to the myriad islets and atolls in the South China Sea.

The newspaper said that the government will also send new maritime surveillance ships to join the fleet responsible for patrolling the South China Sea, believed to be rich in oil and gas and straddling shipping lanes between East Asia and Europe and the Middle East.

The stakes have risen in the area as the U.S. military shifts its attention and resources back to Asia, emboldening its long-time ally the Philippines and former foe Vietnam to take a tougher stance against Beijing.

China has further angered the Philippines and Vietnam by issuing new passports showing a map depicting China's claims to the disputed waters.

(Reporting by Ben Blanchard; Editing by Michael Perry)

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Iran's nuclear stockpile grows but not yet in "danger zone"

VIENNA (Reuters) - An increase in Iran's higher-grade uranium stockpile is worrying but may arise from a bottleneck in making reactor fuel rather than a bid to quickly accumulate material that could be used for nuclear weapons, diplomats and experts say.

The issue of when and how fast Iran might be able to build an atomic bomb if it chose to do so is closely watched in the West because it could determine any decision by Israel to launch pre-emptive strikes against the Islamic Republic.

Tehran's move this year to use a big part of its most sensitive material - which could otherwise be turned into bomb-grade uranium - for civilian fuel purposes helped ease intense speculation of an imminent attack by the Jewish state.

But tension may soon flare again if Iran's holding were to rapidly approach an amount that would be enough for a weapon, either by stepping up output of higher-enriched uranium or by no longer using the material to produce reactor fuel, or both.

"The question is, at what point do they cross the critical point ... when we enter the danger zone?" one senior diplomatic source said. "Will they decide to voluntarily decide to stay clear of that point?"

A U.N. nuclear watchdog report issued this month showed that Iran in late September suddenly stopped converting uranium gas enriched to a fissile concentration of 20 percent into oxide powder to make fuel for a medical research reactor in Tehran.

Because Iran's enrichment work at the same time continued unabated, the halt meant that its stockpile of the higher-grade uranium rose by nearly 50 percent to 135 kg in November compared with the level in the previous quarterly report in August.

"It is very puzzling," said one intelligence official from a country which suspects Iran is seeking to develop a nuclear weapons capability, a charge Tehran denies, about the finding reported by the U.N. International Atomic Energy Agency (IAEA).

It could be because of a technical malfunction or a "test balloon" to see how the West would react, the official added.

It took Iran a significant step closer to the amount of roughly 250 kg seen as sufficient for one atomic bomb if refined further, which Israel has signaled is a "red line" for Iran's nuclear program that may be reached by mid-2013.

"By the late spring, at this pace, Iran will have more than enough to arm its first weapon," said Emanuele Ottolenghi of the Foundation for the Defense of Democracies, a think-tank which has advised the U.S. government on sanctions against Iran.

But some Western diplomats and analysts believe Iran may have let its stockpile grow for reasons related to the fuel manufacturing process, and that it could at some point re-start conversion of uranium gas.

"I think it is a technical issue," one envoy said.

Producing reactor fuel involves several steps. First, the enriched uranium must be converted into oxide powder, then it is turned into fuel plates, and this could help explain the halt in feeding more of the gas into production process.

"It is probably because it is easier and quicker to make the conversion to oxide than to produce the fuel elements," Mark Fitzpatrick, a nuclear proliferation expert at the International Institute for Strategic Studies think-tank, said.

Fitzpatrick said he believed it was "more of a bottleneck" issue, adding: "It is alarming because it brings the 20 percent stockpile closer to a weapons amount. But it is not alarming in the sense that this was a strategic decision on Iran's part."

DANGER ZONE?

Former chief U.N. nuclear inspector Olli Heinonen said he did not find the Iranian nuclear fuel development unusual.

"This is not an industrial manufacturing process, but rather a pilot scale operation," Heinonen, now at Harvard University, said about the production of 20 percent reactor fuel in a facility near the city of Isfahan, which started in late 2011.

"To turn all the material in Isfahan to fuel plates will take more than year. Before doing so, they also want to see the performance of the plates," Heinonen said.

Even so, Western diplomats and others said, Iran's growing accumulation of 20 percent refined uranium in combination with a major expansion of its enrichment capacity in an underground facility are increasing concern over Tehran's intentions.

It may also further complicate diplomatic efforts to resolve the decade-old dispute peacefully as major powers demand that Iran stop all 20 percent enrichment, shut down the Fordow underground site and ship out the stockpile of the material.

"By converting (20 percent uranium) into something else, it reduces the tension, but in no way does it resolve the issue as a whole. They continue to enrich," the diplomatic source said.

Iran says it wants a recognition of what it sees as its right to refine uranium for peaceful energy purposes and a lifting of sanctions, demands rejected by Western powers.

The United States and its allies are especially watching how much 20 percent uranium Iran is amassing, as this is a short technical step away from the 90 percent level needed for bombs.

Iran has sharply expanded this activity - which compares to the 3.5 percent level needed for most nuclear power plants - over the last year to about 15 kg per month.

By August, Iran had produced 233 kg since the work started in early 2010. About 40 percent has been fed into conversion for making fuel, or was about to be, a step that at least for the time being removed it from any dash for a bomb.

Western diplomats are now waiting to see when Iran will switch on about 700 newly-installed centrifuges at Fordow, which would allow it to sharply expand 20 percent enrichment and once again raise the stakes in its stand-off with its foes.

"I think Iran has been trying to calibrate its advances, not necessarily to lower tension, but to try to manage the crisis," Fitzpatrick said.

(Additional reporting by John Irish; Editing by Mark Heinrich)

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Greece, markets satisfied by EU-IMF Greek debt deal

BRUSSELS (Reuters) - The Greek government and financial markets were cheered on Tuesday by an agreement between euro zone finance ministers and the International Monetary Fund to reduce Greece's debt, paving the way for the release of urgently needed aid loans.

The deal, clinched at the third attempt after weeks of wrangling, removes the biggest risk of a sovereign default in the euro zone for now, ensuring the near-bankrupt country will stay afloat at least until after a 2013 German general election.

"Tomorrow, a new day starts for all Greeks," Prime Minister Antonis Samaras told reporters at 3 a.m. in Athens after staying up to follow the tense Brussels negotiations.

After 12 hours of talks, international lenders agreed on a package of measures to reduce Greek debt by more than 40 billion euros, projected to cut it to 124 percent of gross domestic product by 2020.

In an additional new promise, ministers committed to taking further steps to lower Greece's debt to "significantly below 110 percent" in 2022.

That was a veiled acknowledgement that some write-off of loans may be necessary in 2016, the point when Greece is forecast to reach a primary budget surplus, although Germany and its northern allies continue to reject such a step publicly.

Analyst Alex White of JP Morgan called it "another moment of 'creative ambiguity' to match the June (EU) Summit deal on legacy bank assets; i.e. a statement from which all sides can take a degree of comfort".

The euro strengthened, European shares climbed to near a three-week high and safe haven German bonds fell on Tuesday, after the agreement to reduce Greek debt and release loans to keep the economy afloat.

"The political will to reward the Greek austerity and reform measures has already been there for a while. Now, this political will has finally been supplemented by financial support," economist Carsten Brzeski of ING said.

PARLIAMENTARY APPROVAL

To reduce the debt pile, ministers agreed to cut the interest rate on official loans, extend the maturity of Greece's loans from the EFSF bailout fund by 15 years to 30 years, and grant a 10-year interest repayment deferral on those loans.

German Finance Minister Wolfgang Schaeuble said Athens had to come close to achieving a primary surplus, where state income covers its expenditure, excluding the huge debt repayments.

"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," Schaeuble said.

Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13 - after those national parliaments that need to approve the package do so.

The German and Dutch lower houses of parliament and the Grand Committee of the Finnish parliament have to endorse the deal. Losing no time, Schaeuble said he had asked German lawmakers to vote on the package this week.

Greece will receive 43.7 billion euros in four installments once it fulfils all conditions. The 34.4 billion euro December payment will comprise 23.8 billion for banks and 10.6 billion in budget assistance.

The IMF's share, less than a third of the total, will be paid out only once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program.

Austrian Chancellor Werner Faymann welcomed the deal but said Greece still had a long way to go to get its finances and economy into shape. Vice Chancellor Michael Spindelegger told reporters the important thing had been keeping the IMF on board.

"It had threatened to go in a direction that the IMF would exit Greek financing. This was averted and this is decisive for us Europeans," he said.

The debt buy-back was the part of the package on which the least detail was disclosed, to try to avoid giving hedge funds an opportunity to push up prices. Officials have previously talked of a 10 billion euro program to buy debt back from private investors at about 35 cents in the euro.

The ministers promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.

BETTER FUTURE

The deal substantially reduces the risk of a Greek exit from the single currency area, unless political turmoil were to bring down Samaras's pro-bailout coalition and pass power to radical leftists or rightists.

The biggest opposition party, the hard left SYRIZA, which now leads Samaras's center-right New Democracy in opinion polls, dismissed the deal and said it fell short of what was needed to make Greece's debt affordable.

Greece, where the euro zone's debt crisis erupted in late 2009, is proportionately the currency area's most heavily indebted country, despite a big cut this year in the value of privately-held debt. Its economy has shrunk by nearly 25 percent in five years.

Negotiations had been stalled over how Greece's debt, forecast to peak at 190-200 percent of GDP in the coming two years, could be cut to a more bearable 120 percent by 2020.

The agreed figure fell slightly short of that goal, and the IMF insisted that euro zone ministers should make a firm commitment to further steps to reduce the debt if Athens faithfully implements its budget and reform program.

The main question remains whether Greek debt can become affordable without euro zone governments having to write off some of the loans they have made to Athens.

Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but European Union officials believe that line may soften after next September's German general election.

Schaeuble told reporters that it was legally impossible for Germany and other countries to forgive debt while simultaneously giving new loan guarantees. That did not explicitly preclude debt relief at a later stage, once Greece completes its adjustment program and no longer needs new loans.

But senior conservative German lawmaker Gerda Hasselfeldt said there was no legal possibility for a debt "haircut" for Greece in the future either.

At Germany's insistence, earmarked revenue and aid payments will go into a strengthened "segregated account" to ensure that Greece services its debts.

A source familiar with IMF thinking said a loan write-off once Greece has fulfilled its program would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.

German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.

The ministers agreed to reduce interest on already extended bilateral loans in stages from the current 150 basis points above financing costs to 50 bps.

(Additional reporting by Annika Breidhardt, Robin Emmott and John O'Donnell in Brussels, Andreas Rinke and Noah Barkin in Berlin, Michael Shields in Vienna; Writing by Paul Taylor; editing by David Stamp)

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Egyptians challenge Mursi in nationwide protests

CAIRO (Reuters) - Tens of thousands of Egyptians rallied on Tuesday against President Mohamed Mursi in one of the biggest outpourings of protest since Hosni Mubarak's overthrow, accusing the Islamist leader of seeking to impose a new era of autocracy.

Police fired tear gas at stone-throwing youths in streets near the main protest in Cairo's Tahrir Square, heart of the uprising that toppled Mubarak last year. Clashes between Mursi's opponents and supporters erupted in a city north of Cairo.

But violence could not overshadow the show of strength by the normally divided opponents of Islamists in power, posing Mursi with the biggest challenge in his five months in office.

"The people want to bring down the regime," protesters in Tahrir chanted, echoing slogans used in the 2011 revolt.

Protesters also turned out in Alexandria, Suez, Minya and other Nile Delta cities.

Tuesday's unrest by leftists, liberals and other groups deepened the worst crisis since the Muslim Brotherhood politician was elected in June, and exposed the deep divide between the newly empowered Islamists and their opponents.

A 52-year-old protester died after inhaling tear gas in Cairo, the second death since Mursi last week issued a decree that expanded his powers and barred court challenges to his decisions.

Mursi's administration has defended the decree as an effort to speed up reforms and complete a democratic transformation in the Arab world's most populous country.

"Calls for civil disobedience and strikes will be dealt with strictly by law and there is no retreat from the decree," Refa'a Al-Tahtawy, Mursi's presidential chief of staff, told the Al-Hayat private satellite channel.

But opponents say Mursi is behaving like a modern-day pharaoh, a jibe once leveled at Mubarak. The United States, a benefactor to Egypt's military, has expressed concern about more turbulence in a country that has a peace treaty with Israel.

"We don't want a dictatorship again. The Mubarak regime was a dictatorship. We had a revolution to have justice and freedom," 32-year-old Ahmed Husseini said in Cairo.

The fractious ranks of Egypt's non-Islamist opposition have been united on the street by crisis, although they have yet to build an electoral machine to challenge the well-organized Islamists, who have beaten their more secular-minded rivals at the ballot box in two elections held since Mubarak was ousted.

MISCALCULATION

"There are signs that over the last couple of days that Mursi and the Brotherhood realized their mistake," said Elijah Zarwan, a fellow with The European Council on Foreign Relations. He said the protests were "a very clear illustration of how much of a political miscalculation this was".

Mursi's move provoked a rebellion by judges and has battered confidence in an economy struggling after two years of turmoil. The president still must implement unpopular measures to rein in Egypt's crushing budget deficit - action needed to finalize a deal for a $4.8 billion International Monetary Fund loan.

Some protesters have been camped out since Friday in Tahrir and violence has flared around the country, including in a town north of Cairo where a Muslim Brotherhood youth was killed in clashes on Sunday. Hundreds have been injured.

Supporters and opponents of Mursi threw stones at each other and some hurled petrol bombs in the Delta city of el-Mahalla el-Kubra. Medical sources said almost 200 people were injured.

"The main demand is to withdraw the constitutional declaration (decree). This is the point," said Amr Moussa, a former Arab League chief and presidential candidate who has joined the new opposition coalition, the National Salvation Front. The group includes several top liberal politicians.

Some scholars from the prestigious al-Azhar mosque and university joined Tuesday's protest, showing that Mursi and his Brotherhood have alienated some more moderate Muslims. Members of Egypt's large Christian minority also joined in.

Mursi formally quit the Brotherhood on taking office, saying he would be a president for all Egyptians, but he is still a member of its Freedom and Justice Party.

The decree issued on Thursday expanded his powers and protected his decisions from judicial review until the election of a new parliament, expected in the first half of 2013.

In Washington, White House spokesman Jay Carney urged demonstrators to behave peacefully.

"The current constitutional impasse is an internal Egyptian situation that can only be resolved by the Egyptian people, through peaceful democratic dialogue," he told reporters.

New York-based Human Rights Watch said the decree gives Mursi more power than the interim military junta from which he took over.

U.N. Secretary-General Ban Ki-moon told an Austrian paper he would encourage Mursi to resolve the issue by dialogue.

DECREE'S SCOPE DEBATABLE

Trying to ease tensions with judges, Mursi assured Egypt's highest judicial authority that elements of his decree giving his decisions immunity applied only to matters of "sovereign" importance. That should limit it to issues such as declaring war, but experts said there was room for interpretation.

In another step to avoid more confrontation, the Muslim Brotherhood cancelled plans for a rival mass rally in Cairo on Tuesday to support the decree. Violence has flared in Cairo in the past when both sides have taken to the streets.

But there has been no retreat on other elements of the decree, including a stipulation that the Islamist-dominated body writing a new constitution be protected from legal challenge.

"The decree must be cancelled and the constituent assembly should be reformed. All intellectuals have left it and now it is controlled by Islamists," said 50-year-old Noha Abol Fotouh.

With its popular legitimacy undermined by the withdrawal of most of its non-Islamist members, the assembly faces a series of court cases from plaintiffs who say it was formed illegally.

Mursi issued the decree on November 22, a day after he won U.S. and international praise for brokering an end to eight days of violence between Israel and Hamas around the Gaza Strip.

Mursi's decree was seen as targeting in part a legal establishment still largely unreformed from Mubarak's era, when the Brotherhood was outlawed.

Though both Islamists and their opponents broadly agree that the judiciary needs reform, Mursi's rivals oppose his methods.

Rulings from an array of courts this year have dealt a series of blows to the Brotherhood, leading to the dissolution of the first constitutional assembly and the lower house of parliament elected a year ago. The Brotherhood dominated both.

The judiciary blocked an attempt by Mursi to reconvene the Brotherhood-led parliament after his election victory. It also stood in the way of his attempt to sack the prosecutor general, another Mubarak holdover, in October.

In his decree, Mursi gave himself the power to sack that prosecutor and appoint a new one. In open defiance of Mursi, some judges are refusing to acknowledge that step.

(Additional reporting by Tom Perry, Seham Eloraby, Marwa Awad and Yasmine Saleh in Cairo and Michael Shields in Vienna; Writing by Edmund Blair and Tom Perry; Editing by Giles Elgood/Mark Heinrich)

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Senate works on new package of Iran sanctions

WASHINGTON (Reuters) - New sanctions aimed at reducing global trade with Iran in the energy, shipping and metals sectors may soon be considered by the U.S. Senate as part of an annual defense policy bill, senators and aides said on Tuesday.

The sanctions legislation, which has not yet been unveiled, comes during a crowded calendar as the Senate races to deal with deficit reduction, the defense bill and other pressing issues by the end of the year.

The package would build on current U.S. sanctions, passed almost a year ago, that have slashed Iran's oil revenues. The goal is to pressure Tehran to stop efforts to enrich uranium to levels that could be used in weapons.

Tehran has said its nuclear program is strictly for civilian purposes.

Democratic Senator Robert Menendez and Republican Mark Kirk have crafted new sanctions that would punish foreign banks that handle transactions for a broad sector of industries, including shipping, ports, ship building and more types of energy.

"Our significant effort right now is in pursuing areas of the economy that can lead to proliferation - energy, shipping, to mention a few," Menendez said in a brief hallway interview.

U.S. persons and companies have long been barred from doing business with Iranian entities. These new sanctions apply to foreign banks, threatening to ban them from the U.S. financial system unless they cut their dealings with Iran.

Senator Carl Levin, the Democratic chairman of the Armed Services Committee, said he was reviewing a draft version of the sanctions and was amenable to the measures being added to the defense bill.

"It's fine with me," Levin said. "Going in, I favor strengthening any way we can the sanctions against Iran."

The package seeks to ban financial transactions with any person or organization blacklisted for their association with the Iranian government, as well as sales of metallurgical coal and precious metals, a congressional aide said, speaking on condition of anonymity.

The sanctions would end "Turkey's game of gold for natural gas," a senior Senate aide said, referring to reports that Turkey has been paying for natural gas with gold due to sanctions rules.

The legislation "would bring economic sanctions on Iran near de facto trade embargo levels with the hope of speeding up the date by which Iran's economy will collapse," the aide said.

The legislation will also impose new bans on insurance and re-insurance for shipments of a broader range of goods, aides said.

(Editing by Cynthia Osterman)

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Syria launches air strikes as combat rages in Damascus

BEIRUT (Reuters) - Syrian war planes attacked towns in the country's north and east and killed at least five civilians in a strike on an olive oil press as fighting raged in the capital Damascus on Tuesday, opposition activists said.

The latest fighting follows recent battlefield gains by the rebels in their struggle to topple President Bashar al-Assad, but it is far from clear if a strategic breakthrough is likely.

More than 90 people were killed on Tuesday, according to the Syrian Observatory for Human Rights, a Britain-based group.

Rebels trying to make inroads into the capital battled government forces in the suburb of Kfar Souseh on the edge of the centre of the capital, activists said.

In Aleppo province in the north, rebels shot down a military helicopter, according to video footage posted on YouTube that showed what appeared to be a missile hitting the aircraft.

Security sources and activists have reported a small but growing number of heat-seeking anti-aircraft missiles entering Syria, weapons the rebels would need to stand any chance of overcoming Assad's increasing reliance on air power.

The video could be one of the first clear indications that such weapons are in use. The Local Coordinating Committee opposition group said the Free Syrian Army had downed the helicopter near the Sheikh Suleiman army base, 30 km (20 miles) northwest of the contested city of Aleppo.

More than 40,000 people have been killed in the uprising, activists said. What began as a series of peaceful protests against four decades of Assad family rule in March last year grew into a bitter civil war with sectarian overtones.

U.N. Special Coordinator for the Middle East Peace Process, Robert Serry, told the U.N. Security Council on Tuesday that around 450,000 are now believed to have fled Syria, with even more displaced inside the country.

"Destruction, death and suffering have become part of daily life across Syria," Serry said. "The humanitarian crisis is becoming more acute with the winter upon us and the number of those in need growing, potentially reaching 4 million inside Syria by the end of 2012."

International Syria mediator Lakhdar Brahimi is due to brief the 15-member council on Thursday and the U.N. General Assembly on Friday. There is diplomatic deadlock between Western powers, who broadly support the opposition and Assad's supporters Russia and China which have blocked Security Council action.

CAR BLASTS AND BARREL BOMBS

Syrian state television said that two people were killed and four wounded in a "terrorist suicide car bomb" in Artouz, near Damascus. The Observatory said the explosion was caused by a car bomb next to a military police checkpoint.

Near the Old City in Damascus, a car bomb killed one person and blew the legs off another man, according to opposition activist Samir al-Shami. He said it was unclear if the car, a white Toyota, was rigged by Assad loyalists or rebels.

In northern Idlib province, a government jet dropped barrel bombs - cylinders packed with explosives and petrol - at the Abu Hilal olive oil press, 2 km (1.2 miles) west of Idlib city, activist Tareq Abdelhaq said.

At least five people were killed and five wounded in the attack, according to the Observatory. Abdelhaq placed the number much higher, citing locals saying that at least 20 were killed and 50 wounded.

Activists said the victims were civilians waiting to press their olives for oil, but they said opposition fighters were in the area. It was unclear if there were any rebel targets nearby.

Combat also took place in the Baba Amr district of Homs city, an area that was overrun by government troops in February, as well as in Aleppo, Deir al-Zor, Deraa, Idlib province and Hama province, the Observatory said.

AIR STRIKES

Rebels have captured at least five army and air force installations in the past 10 days, putting pressure on Assad's forces in Aleppo and Idlib and the eastern oil region of Deir al-Zor.

The opposition are calling for international military aid, particularly against air attacks, but Western powers who support the uprising are wary of radical Islamist units among the rebels. However, some anti-aircraft equipment has been seized from captured army bases.

The government also launched air strikes on Deir al-Zor city and on the strategic town of Maraat al-Numan in Idlib province on Tuesday.

The rebel takeover of Maarat al-Numan last month effectively cut the main north-south highway, a route for Assad to move troops from the Damascus to Aleppo, Syria's largest city where rebels have taken a foothold.

Most foreign powers have condemned Assad, and Britain, France and Gulf countries have recognized an umbrella opposition group, the Syrian National Coalition, as the sole representative of the Syrian people.

But Assad has been able to rely on his allies, especially regional powerhouse Iran, which is believed to be bankrolling him and supplying military support despite U.S. and European sanctions. Russia, its main arms supplier, says it has only sent weapons already agreed to in previous deals.

Nonprofit news website ProPublica reported on Monday that Russia sent 240 metric tons of bank notes to Damascus this summer. U.S. and European sanctions include a ban on minting Syrian banknotes.

(Editing by Jon Hemming)

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Thousands protest in Bangladesh, blaze draws U.S. scrutiny

DHAKA/CHICAGO (Reuters) - Thousands of angry textile workers demonstrated in the outskirts of Dhaka on Monday after a fire swept through a garment workshop at the weekend, killing more than 100 people in Bangladesh's worst-ever factory blaze.

The fire has put a spotlight on global retailers that source clothes from Bangladesh, where the cost of labor is low - as little as $37 a month for some workers - and rights groups have called on big-brand firms to sign up to a fire safety program.

Wal-Mart Stores Inc, the world's largest retailer, said one of its suppliers subcontracted work to the factory without authorization and would no longer be used. A number of other retailers like Gap Inc and Nike Inc rushed to deny any relationship with the workshop.

Demanding that those responsible for the disaster be punished, workers from Tazreen Fashions and residents blocked roads and forced the closure of other factories in the industrial suburb of Ashulia, where the huge fire started.

"I haven't been able to find my mother," said one worker, who gave her name as Shahida. "I demand justice, I demand that the owner be arrested."

Police and officials said narrow exits in the nine-storey building trapped workers inside, killing 111 people and injuring more than 150.

"This disastrous fire incident was a result of continuing neglect of workers' safety and their welfare," said Amirul Haque Amin, president of Bangladesh's National Garment Workers Federation.

"Whenever a fire or accident occurs, the government sets up an investigation and the authorities - including factory owners - pay out some money and hold out assurances to improve safety standards and working conditions. But they never do it."

PRESSURE ON GLOBAL FIRMS

Working conditions at Bangladeshi factories are notoriously poor, with little enforcement of safety laws. Overcrowding and locked fire doors are common. More than 300 factories near the capital shut for almost a week this year as workers demanded higher wages and better conditions.

At least 500 people have died in clothing factory accidents in Bangladesh since 2006, according to fire brigade officials.

Bangladesh has about 4,500 garment factories and is the world's biggest exporter of clothing after China, with garments making up 80 percent of its $24 billion annual exports.

Wal-Mart initially said it was not sure if it used the factory or not. The retailer later said that while Tazreen Fashions was no longer one of its authorized vendors, a supplier - which the company would not name - subcontracted there anyway.

"The fact that this occurred is extremely troubling to us, and we will continue to work across the apparel industry to improve fire safety education and training in Bangladesh," the company said in a statement.

The International Labour Rights Forum said U.S.-based PVH Corp, whose brands include Calvin Klein, entered into an agreement earlier this year to develop a fire safety program in Bangladesh, but others have not signed up. Retailer Gap said last month it would launch its own safety program after industry peers took too long to negotiate a common set of standards.

"We hope the tragic fire at Tazreen will serve as an urgent call to action for all major brands that rely on Bangladesh's low wages to make a profit," ILRF Executive Director Judy Gearhart said in a statement on Sunday.

Hong Kong-listed Li & Fung said in a statement it had placed orders for garments from Tazreen Fashions that were being manufactured on the premises where the fire broke out.

It said it would provide relief to victims' families, and carry out its own investigation into what caused the blaze.

The European spokesman for retailer C&A said Tazreen Fashions was due to deliver 220,000 sweatshirts for its Brazilian stores over the coming three months.

He said an independent company normally audits companies and factories for standards and working conditions before C&A enters into a business relationship with them, but the audit of Tazreen Fashions had not yet been carried out.

CONSUMERS UNMOVED

One expert on labor relations said it was highly unlikely consumers would be moved to stop shopping at Wal-Mart just because of the association with the burned workshop.

"Most people are just looking for a bargain and they don't have the time or the inclination to find out who's making them and should we buy this stuff or not," said James Gross, a professor of labor in the school of industrial and labor relations at Cornell University in New York.

The fire has drawn fresh attention in the United States to working conditions overseas, but it is also not the first time that American shoppers have been confronted with uncomfortable realities about how their consumer goods are made.

Whether the news was about worker suicides at the Foxconn plants in China making Apple Inc's iPhones, allegations that Nike used child labor in Indonesia or claims of endemic rape at border factories in Mexico, little has disturbed American shoppers in their search for value.

"(We) know that the consumer sentiment in these markets is not to pay higher prices, so the companies that import are also looking for ways to cut costs, since it is a relationship," said Munir Mashooqullah, founder of New York-based sourcing company Synergies Worldwide.

"If consumers are not willing to pay higher prices, the companies are not willing to pay more in manufacturing," said Mashooqullah, who works with various Western retailers and manufacturers in Bangladesh, Pakistan and India.

Few remember today, for example, the 1993 fire in Thailand that killed 188 people, mostly young rural women seeking a better life, manufacturing toys for top American brands.

An International Labour Organization case study on the fire found that the factory had not been properly fireproofed and that workers in general received inadequate protection.

That fire took the place in the record books of the Triangle Shirtwaist disaster, the 1911 New York conflagration that killed 146 people and led to changes in labor conditions in the American workplace.

(Reporting by Serajul Quadir and Anis Ahmed in Bangalore and Nivedita Bhattacharjee and Jessica Wohl in Chicago; Additional reporting by Jonathan Gould in Frankfurt and Dominique Vidalon in Paris; Writing by John Chalmers and Ben Berkowitz; Editing by Sophie Hares, Gary Hill)

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Egypt's Islamists seek to defuse crisis over decree

CAIRO (Reuters) - Egypt's ruling Islamists tried to defuse a political crisis on Monday, with President Mohamed Mursi backing a compromise over his seizure of extended powers and his Muslim Brotherhood calling off a planned demonstration.

Mursi provoked outrage last week that led to violent protests when he issued a decree that put beyond judicial review any decision he takes until a new parliament is elected, drawing charges he had given himself the powers of a modern-day pharaoh.

Opponents plan to go ahead with a big demonstration on Tuesday to demand he scrap the decree, threatening more turmoil for a nation that has been stumbling towards democracy for almost two years since president Hosni Mubarak was ousted.

However, the Brotherhood, which was behind Mursi's election win in June, said it had called off a rival protest also planned for Tuesday in Cairo. Violence has flared when both sides turned out in the past.

Mursi's opponents have accused him of behaving like a dictator and the West has voiced its concern, worried by more turbulence in a country that has a peace treaty with Israel and lies at the heart of the Arab Spring.

Mursi held crisis talks with members of the Supreme Judicial Council, the nation's highest judicial body, to resolve the crisis over the decree that was seen as targeting in part a legal establishment still largely unreformed from Mubarak's era.

The council had proposed he limit the scope of decisions that would be immune from judicial review to "sovereign matters", language the presidential spokesman said Mursi backed.

"The president said he had the utmost respect for the judicial authority and its members," spokesman Yasser Ali told reporters in announcing the agreement.

After reading out the statement outlining what was agreed with judges, Ali told Reuters: "The statement I read is an indication that the issue is resolved."

PROTEST GOES ON

Protesters camped out in Cairo's Tahrir Square since Friday to demand that the decree be scrapped said the president had not done enough to defuse the row. "We reject the constitutional declaration (decree) and it must be completely cancelled," said Sherif Qotb, 37, protesting amongst tents erected in the square.

Mursi's administration has defended his decree as an effort to speed up reforms and complete a democratic transformation. Leftists, liberals, socialists and others say it has exposed the autocratic impulses of a man once jailed by Mubarak.

Mona Amer, spokesman for the opposition movement Popular Current, said Tuesday's protest would go on. "We asked for the cancellation of the decree and that did not happen," she said.

Protesters are worried that the Muslim Brotherhood aims to dominate the post-Mubarak era after winning the first democratic parliamentary and presidential elections this year.

The crisis has exposed a rift between Islamists and their opponents. One person has been killed and about 370 injured in violence since Mursi issued Thursday's decree, emboldened by international praise for brokering an end to eight days of violence between Israel and Hamas in Gaza.

Before the president's announcement, leftist politician Hamdeen Sabahy said protests would continue until the decree was scrapped and said Tahrir would be a model of an "Egypt that will not accept a new dictator because it brought down the old one".

As well as shielding his decisions from judicial review, Mursi's decree protected an Islamist-dominated assembly drawing up a new constitution from legal challenge. Liberals and others say their voices are being ignored in that assembly, and many have walked out.

Only once a constitution is written can a new parliamentary election be held. Until then, legislative and executive power remains in Mursi's hands.

Though both Islamists and their opponents broadly agree that the judiciary needs reform, his rivals oppose Mursi's methods.

'NO CONFLICT'

The Supreme Constitutional Court was responsible for declaring the Islamist-dominated parliament void, leading to its dissolution this year. One presidential source said Mursi was looking for ways to reach a deal to restructure that court.

"The president and the Supreme Judicial Council confirmed their desire for no conflict or difference between the judicial and presidential authorities," spokesman Ali said.

The council had sought to defuse anger in the judiciary by urging some judges and others who had gone on strike to return to work and by proposing the idea that only decisions on "sovereign matters" be immune from legal challenge.

Legal experts said "sovereign matters" could be confined to issues such as declaring war or calling elections that are already beyond legal review. But they said Egypt's legal system had sometimes used the term more broadly, suggesting that the wording leaves wide room for interpretation.

A group of lawyers and activists has also already challenged Mursi's decree in an administrative court, which said it would hold its first hearing on December 4. Other decisions by Mursi have faced similar legal challenges brought to court by opponents.

Mursi's office repeated assurances that the steps would be temporary, and said he wanted dialogue with political groups to find "common ground" over what should go into the constitution.

The president's calls for dialogue have been rejected by members of the National Salvation Front, a new opposition coalition of liberals, leftists and other politicians and parties, who until Mursi's decree had been a fractious bunch struggling to unite.

The Front includes Sabahy, Nobel Peace Prize laureate Mohamed ElBaradei and former Arab League chief Amr Moussa.

The military has stayed out of the crisis after leading Egypt through a messy 16-month transition to a presidential election in June. Analysts say Mursi neutralized the army when he sacked top generals in August, appointing a new generation who now owe their advancement to the Islamist president.

Though the military still wields influence through business interests and a security role, it is out of frontline politics.

(Writing by Edmund Blair, Additional reporting by Yasmine Saleh; editing by David Stamp)

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U.N. chief says crises show need for interfaith amity

VIENNA (Reuters)- The violent crises in Syria, Gaza and Mali show how important it is for different religions to work together to promote understanding rather than sow hatred, United Nations Secretary General Ban Ki-Moon said on Monday.

Addressing the opening of a new Saudi-backed interfaith centre in Vienna, he said the Syrian conflict was "taking on troubling sectarian dimensions" and "unrest (continues) between Israelis and Palestinians."

Valuable religious monuments had been destroyed in Mali, he said, referring to the destruction of centuries-old Muslim heritage by the radical Islamist Ansar Dine movement.

Religious leaders "can unite people based on tenets and precepts common to all creeds" but at times have also "stoked intolerance, supported extremism and propagated hate."

"I fully support your vision of religion as an enabler of respect and reconciliation," he told about 800 religious officials and activists meeting in the Austrian capital to discuss how to promote better understanding among faiths.

Named after Saudi King Abdullah, the new centre is a welcome boost for bridge-building between faiths in an era of financial austerity but has drawn criticism because Saudi Arabia enforces a strict Islamic code and bans non-Muslim religious practice.

It plans to work first on improving how religions are presented in media and schoolbooks, involving faith leaders in children's health campaigns in poor countries and hosting religious leaders for fellowships at its Vienna headquarters.

"LONG MARCH" TO REFORM

The King Abdullah bin Abdulaziz International Centre for Interreligious and Intercultural Dialogue (KAICIID) is the latest step in what Saudi Foreign Minister Saud al-Faisal called his country's "long march" towards cautious reform at home and improved relations with faith around the world.

"Religion has been the basis for many conflicts," he said.

Spurred into action by the September 11, 2001 attacks in the United States - in which most of the militants involved were Saudi nationals - and radical Islamist bombings in Saudi Arabia two years later, the king has brought together Sunni and Shi'ite Muslims in Mecca to discuss how to counter extremism in Islam.

He hosted an interfaith conference in 2008 but had to hold it in Madrid because the kingdom is so conservative. However, Saudi officials at the Vienna conference stressed the dialogue message was being spread back home as well.

"The aim is to promote acceptance of other cultures, moderation and tolerance," said Fahad Sultan AlSultan, deputy head of a Saudi national dialogue effort launched in 2003. "There are problems but we have achieved some success."

KAICIID is managed by a board with three Muslims, three Christians, a Jew, a Buddhist and a Hindu. It aims to help religions contribute to solving problems such as conflicts, prejudice and health crises rather than be misused to worsen them.

"The prime purpose is to empower the active work of those in the field, whether in the field of dialogue, of social activism or of conflict resolution," said Jerusalem-based Rabbi David Rosen, representing Judaism on the nine-seat board of directors.

"WE ARE BEING WATCHED"

Unlike other interfaith projects run by churches or non-governmental organizations, KAICIID is an international body sponsored by Saudi Arabia, Austria and Spain, with strong backing from the Vatican as a "founding observer".

Cardinal Jean-Louis Tauran, the Vatican's top dialogue official, warned his partners they faced a huge challenge.

"We are being watched," he said. Public opinion expected the centre to be a forum for dialogue on "religious freedom in all its respects, for everybody, for every community, everywhere."

Tauran, who has in the past urged Saudi Arabia to allow Christians to open churches there, said the Roman Catholic Church was among those focusing on religious rights.

"The Holy See is particularly attentive to the fate of Christian communities in countries where such a freedom is not adequately guaranteed," he said.

Abdullah al-Turki, head of the World Muslim League that has spread Saudi Arabia's strict Wahhabi school of Islam around the world for decades, used the opening ceremony to revive an issue other Muslim groups had quietly abandoned as unattainable.

"We hope this centre will support the international effort to issue an international law criminalizing the abuse of religions and God's prophets," he said.

The Organisation of Islamic Cooperation (OIC) admitted in September it could not win United Nations support to outlaw blasphemy despite years of effort and said it would no longer try. Western states oppose a ban as a violation of free speech.

AUSTRIAN CRITICS

Austrian Foreign Minister Michael Spindelegger defended the establishment of KAICIID in Vienna, saying "it is my deep conviction that there is no alternative to this dialogue".

But the centre's Austrian critics kept up a drum beat of criticism. A group called Liberal Muslims held a small protest outside the Hofburg against Saudi human rights violations.

The Green Party said Austria was naive to think Saudi Arabia, which has financed many mosques espousing the austere Wahhabi form of Islam in Europe, had no ulterior motives in paying for the centre's headquarters and first 3 years' budget.

KAICIID officials say the centre is independent and would not be promoting any one religion.

(Additional reporting by Georgina Prodhan)

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