UPDATE 2-Gas row not political, Israel and Egypt say
* Israeli, Egyptian ties strained since Mubarak was ousted
* Gas deal was criticised even during Mubarak's era
* Mubarak ally facing corruption charges, including over deal
JERUSALEM/CAIRO, April 23 (Reuters) - Israel's prime minister on Monday played down Egypt's termination of a gas supply deal after the Israeli finance minister said the move cast a shadow over the peace agreement between the two countries.
Prime Minister Benjamin Netanyahu said the cancellation of the contract supplying Israel with 40 percent of its gas needs, announced on Sunday, resulted from a business rather than a diplomatic dispute.
Egyptian officials also said it was a trade issue, although there have been growing public calls for Egypt to review ties with Israel since the overthrow of Hosni Mubarak, for whom a peace treaty with Israel was a cornerstone of regional policy.
Minister of International Cooperation Faiza Abu el-Naga said the Israeli side was welcome to negotiate a new contract.
Questions over Cairo's attitude to Israel after the dramatic political changes in Egypt appeared anew in the Israeli media, with one headline, in the popular Yedioth Ahronoth daily, reading: "They don't want us".
Egyptian politicians welcomed the move to end a deal heavily criticised even under Mubarak. Opposition media and the public accused his government of giving Israel preferential pricing and using the deal to benefit his allies.
Israeli officials say gas has not flowed from Egypt to Israel for most of this year due to a series of attacks on the pipeline running through Egypt's volatile Sinai peninsula.
Israel has turned to more expensive fuel supplies and has warned residents to expect electricity outages this summer.
"We don't see this cut-off of the gas as something that is born out of political developments," Netanyahu told reporters. "It's actually a business dispute between the Israeli company and the Egyptian company."
Two Israeli officials made a brief trip to Cairo on Monday for talks on the gas deal, Cairo airport sources said, and Egypt's ambassador met Israeli Deputy Foreign Minister Danny Ayalon to "provide clarifications", Israeli media reported.
Israeli Foreign Minister Avigdor Lieberman said in a radio interview that Israel was interested in maintaining its peace treaty with Cairo and he believed "this is also a supreme interest of Egypt".
Egypt was the first of two Arab countries to sign a peace treaty with Israel, in 1979, followed by Jordan in 1994 and the gas deal was the most significant economic agreement to follow.
State-owned Egyptian company EGAS confirmed the termination of the 20-year contract, which was agreed in 2005, on Sunday. The Egyptian state firm supplied gas for the deal between another Egyptian firm, East Mediterranean Gas (EMG), and Israel.
Hussein Salem, a businessman and close Mubarak associate, is a major shareholder in the gas firm EMG. He is now on trial in absentia facing a range of corruption charges, including some related to his involvement in the gas deal.
Reflecting popular anger at the deal, Egyptian presidential candidate Amr Moussa, a former head of the Arab League and ex-foreign minister, said ending it was "a natural step in light of information related to corruption which tarnished this deal".
A spokesman for Egypt's Muslim Brotherhood, the Islamist group that dominates parliament, said the move was an "excellent decision" and had nothing to do with the peace treaty. Mahmoud Ghozlan said Egypt needed more gas for domestic use.
Egypt's presidential election starts on May 23 and 24 and criticism of the peace deal with Israel is frequently raised during campaign rallies, although the main candidates and groups such as the Brotherhood say they will respect Egypt's international treaties.
EGAS Chairman Mohamed Shoeib said the decision was not political, telling Egypt's Hayat TV, "EGAS ended the deal because the other party didn't fulfil its commitments".
Egypt's oil minister, Abdullah Ghorab, said the row "does not go beyond a commercial dispute and is not governed by any political considerations" or reflect the state's position.
Abu El-Naga said it was about non-payment. "This is a commercial contract between two companies and they were notified five times of non-payment and they did not respond," she said.
An official in the Israeli energy sector, who did not want to be named said: "To pay for what, gas we never received? Nothing changes the fact that there is a violation of Egypt's commitment to supply gas. We need to remember that there was almost no supply of Egyptian gas in the past year."
Ties have been strained since Mubarak's ouster. Israel's ambassador was evacuated in September after demonstrators stormed its embassy in central Cairo during a protest over a deadly border shooting in August. Israeli diplomats have worked from the ambassador's residence in a suburb since then.
Israeli Finance Minister Yuval Steinitz voiced alarm on Sunday about the economic as well as diplomatic repercussions of the decision to end the contract.
Steinitz also said the Egyptian cancellation had set "a dangerous precedent which casts a shadow on the peace agreements and the peaceful atmosphere between Egypt and Israel".
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