UPDATE 4-Egyptian military says only dialogue can avert disaster
* Army statement not seen as prelude to intervention
* Opposition boycotts President Mursi's "national dialogue"
* Islamists say referendum must go ahead on Dec. 15
* Unrest ignited by Mursi's extra powers decree
By Alistair Lyon and Tamim Elyan
CAIRO, Dec 8 (Reuters) - Egypt's military, stepping into a crisis pitting Islamist President Mohamed Mursi against opponents who accuse him of grabbing excessive power, said on Saturday only dialogue could avert "catastrophe".
State broadcasters interrupted their programmes to read out an army statement telling feuding factions that a solution to the upheaval in the most populous Arab nation should not contradict "legitimacy and the rules of democracy".
That sounded like a swipe at protesters who have besieged the palace of the freely elected president and called for his removal, going beyond mainstream opposition demands for him to retract a decree that expanded his powers.
The statement also called for a "serious" national dialogue - perhaps one more credible than talks convened by Mursi on Saturday in the absence of opposition leaders. They insist he must first scrap his Nov. 22 decree, defer next week's popular vote on a new constitution and allow the text to be revised.
Deep rifts have emerged over the destiny of a country of 83 million where the end of Hosni Mubarak's 30 years of military-backed one-man rule led to a messy army-led transition, during which the Muslim Brotherhood and its allies won two elections. Many Egyptians crave stability and economic recovery.
The spokesman for the main Islamist coalition demanded that the referendum go ahead on time on the constitution drafted by an Islamist-led assembly from which liberals had walked out.
The army, which ran Egypt for months after Mubarak fell in February 2011, again cast itself primarily as the neutral guarantor of the nation. A military source said there was no plan to retake control of the country or its turbulent streets.
"The armed forces affirm that dialogue is the best and only way to reach consensus," the statement said. "The opposite of that will bring us to a dark tunnel that will result in catastrophe and that is something we will not allow."
Mursi's office said the president opened his "national dialogue" with about 40 political and other public figures discussing "means to reach a solution to differences over the referendum...and the constitutional decree".
Prime Minister Hisham Kandil told an Egyptian television channel that the talks had led to creating a committee to review Mursi's Nov. 22 decree and to work out legal ways to postpone the referendum. He said a new decree could be issued.
"All options are on the table to reach consensus," he said, adding that it was vital to take action to shore up Egypt's economy that has been battered by the turmoil.
The main opposition coalition, the National Salvation Front, which boycotted Mursi's dialogue repeated its call on Saturday for scrapping the decree and the referendum on the constitution.
Instability in Egypt worries the West, especially the United States, which has given Cairo billions of dollars in military and other aid since it made peace with Israel in 1979.
The army might be pushing the opposition to join dialogue and Mursi to do more to draw them in, said Hassan Abu Taleb of the Al Ahram Center for Political and Strategic Studies.
He discounted the chance of direct military intervention, adding: "They realise that interfering again in a situation of civil combat will squeeze them between two rocks."
However, the military did seem poised to take a more active role in security arrangements for the Dec. 15 referendum.
A cabinet source said the cabinet had discussed reviving the army's ability to make arrests if it were called upon to back up police, who are normally in charge of election security.
According to the state-run daily al-Ahram, an expanded military security role might extend to the next parliamentary election and, at the president's discretion, even beyond that.
The army issued its statement while protesters were still camped out by the gates of the presidential palace.
The tens of thousands of Mursi foes who surged past tanks and barbed wire to reach the palace gates on Friday night had dispersed. But a hard core stayed overnight in a score of tents.
Some had spray-painted "Down with Mursi" on tanks of the elite Republican Guard posted there after clashes between rival groups killed at least seven people and wounded 350 this week.
Others draped the tanks with posters of Mursi and the word "Leave" scored across his face in red letters.
"We are no longer calling for scrapping the decree and delaying the referendum," Samir Fayez, a Christian protester at the palace, said. "We have one demand in five letters: leave."
Nearby, a Mursi supporter named Mohamed Hassan was quietly observing the scene. He suggested that the Muslim Brotherhood and its ultra-orthodox Salafi Islamist allies could easily overwhelm their foes if they chose to mobilise their base.
"The Brotherhood and Salafis by themselves are few but they have millions of supporters who are at home and haven't taken it to the streets yet," murmured the 40-year-old engineer.
The Muslim Brotherhood's supreme guide, Mohamed Badie, denounced opposition protests that have swirled around the walls of Mursi's palace, saying they "ruin legitimacy".
Badie said eight people, all of them Brotherhood members, had been killed this week and urged the interior minister to explain why police had failed to prevent assailants from torching the organisation's headquarters and 28 other offices.
"Get angry with the Brotherhood and hate us as much as you like, but be reasonable and preserve Egypt's unity," he told a news conference. "We hope everyone gets back to dialogue."
The well-organised Brotherhood, which thrust Mursi from obscurity to power, remains his surest source of support.
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