U.S. nears deal for $1 billion in Egypt debt relief: source

Egypt's President Mohamed Mursi speaks with China's Vice President Xi Jinping (not pictured) during their meeting at the Great Hall of the People, in Beijing August 29, 2012.

WASHINGTON (Reuters) - The Obama administration is close to a deal with Egypt's new government for $1 billion in debt relief, a senior U.S. official said on Monday, as Washington seeks to help Cairo shore up its ailing economy in the aftermath of its pro-democracy uprising.

U.S. diplomats and negotiators for Egypt's new Islamist president Mohamed Mursi - who took office in June after the country's first free elections - were working to finalize an agreement, the official said.

Progress on the aid package, which had languished during Egypt's 18 months of political turmoil, appears to reflect a cautious easing of U.S. suspicions about Mursi and a desire to show economic goodwill to help keep the longstanding U.S.-Egyptian partnership from deteriorating further.

The United States was a close ally of Egypt under ousted autocratic President Hosni Mubarak and gives $1.3 billion in military aid a year to Egypt plus other assistance.

Obama ultimately called for Mubarak to step down as he faced mass protests in early 2011 but the U.S. president was criticized for taking too long to assert U.S. influence.

Washington, long wary of Islamists, shifted policy last year to open formal contacts with the Muslim Brotherhood, the group behind Mursi's win. Mursi formally resigned from the group after his victory.

Analysts say that one way the United States could influence the direction of policy in Egypt, a nation at the heart of Washington's regional policy since a peace treaty was signed with Israel in 1979, would be through economic support as Cairo tries to stave off a balance of payments and budget crisis.

Obama first pledged economic help for Cairo last year. Obstacles remained to completing the debt relief deal - which is reported to involve a mix of debt payment waivers and complicated "debt swaps" - and it was not immediately clear when an agreement might be announced.

But even as the negotiations proceeded in Cairo, Washington has also signaled its backing for a $4.8 billion loan that Egypt is seeking from the International Monetary Fund and which it hopes to secure by the end of the year to bolster its stricken economy. IMF chief Christine Lagarde visited Cairo last month to discuss the matter.

Egypt's military-appointed interim government had been negotiating a $3.2 billion package before it handed power to Mursi on June 30. Mursi's government then increased the request.

Lagarde said the IMF would look at fiscal, monetary and structural issues, promising that the IMF would be a partner in "an Egyptian journey" of economic reform.

(Reporting By Matt Spetalnick; Editing by Todd Eastham and Eric Walsh)