UPDATE 1-EU pledges up to 700 million euros in aid to Egypt
* Pledge coincides with Islamist president's first Europe trip
* EU funds conditional on IMF deal for Egypt
* Mursi reassures West after attacks on U.S. embassy
By Sebastian Moffett and Justyna Pawlak
BRUSSELS, Sept 13 (Reuters) - The European Union offered Egypt economic aid of up to 700 million euros ($902 million) on Thursday, showing how European governments are trying to build ties with the Islamist rulers brought to power in Egypt's first free elections.
The pledge came as Egyptian President Mohamed Mursi made his first trip to Europe since his election in June, hoping to reassure the EU of his democratic credentials and win economic aid as he looks to revive the broken economy.
He rose to power under the Muslim Brotherhood, which is opposed to Israel and with which Washington only opened formal relations last year. Mursi said on Thursday he backed peaceful protest but not attacks on embassies after Egyptians angry at a film deemed insulting to the Prophet Mohammad climbed into the U.S. embassy in Cairo and tore down the American flag.
Europe wants to keep Egypt as a firm ally of the West after the collapse of Hosni Mubarak's authoritarian rule last year, and hopes Cairo can turn into an example in a region that has seen tumultuous change since the Arab Spring began in 2011.
"Egypt is a key country in a region that is so close to and important for Europe," said Herman Van Rompuy, president of the European Council, which represents EU governments. "Egypt's success would have positive repercussions on the region as a whole."
Jose Manuel Barroso, the president of the European Commission, said the EU had offered Egypt macro-economic aid of 500 million euros - conditional on Egypt reaching an agreement with the International Monetary Fund (IMF) on financial assistance - as well as between 150 and 200 million euros to fund an agreed economic recovery plan.
These pledges come on top of 449 million euros the EU has already made available to Egypt for the period 2011-2013 to support programmes such as vocational training for young people.
The EU has ambitious plans to guide North Africa - which the bloc calls its "southern neighbourhood" - towards deeper democracy after the Arab Spring, and EU officials say they want to make clear links between aid and democratic reforms.
The talks in Brussels included questions about a new democratic constitution for Egypt, on which talks have stalled over the role of Islam in law.
"The political context of this visit is very important," a senior EU official said on Wednesday. "Egypt is now debating its future constitution which will be key for the country ... and we hope a reference for the rest of the Arab countries."
The EU is Egypt's biggest trading partner, with figures for 2010 showing trade nearly four times more valuable than with the United States, Cairo's second biggest partner.
But the bloc faces competition for influence. Mursi's first trip outside the Arab region and Africa since his election was to Beijing, Egypt's third-largest trading partner. The United States has bankrolled Egypt's military for decades, giving Washington particular leverage.
So far, the U.S. approach to Mursi's Islamist government has been cautious. Asked on television on Wednesday whether Egypt was still an ally of the United States, President Barack Obama said it was neither an ally nor an enemy. Under Mubarak, the United States usually described Egypt as a strategic ally.
The EU leaders, by contrast, were unequivocal.
Barroso said he was "extremely pleased with the reassurances given today by President Mursi regarding Egypt's unwavering commitment to democracy and the rule of law".
Van Rompuy told Mursi the EU will stand by the side of the Egyptian people, "as a friend, a neighbour and a partner".
Financial assistance is a critical need for Mursi's fledgling government. Last year's revolution damaged tourism revenues and foreign investment. The country is still trying to rebuild unity as well as its shattered economy.
Egypt has already requested a $4.8 billion loan from the IMF in the hope of a deal by the end of year, and has asked for 500 million euros ($644 million) of aid from the European Commission, the EU executive.
But its needs may be far greater. A senior EU official said on Wednesday that it may need financing of more than $10 billion to shore up the state budget and rebuild investor confidence after 18 months of political turmoil.
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