* Mursi supporters signal may be willing for deal
* Egyptian pound strengthens, encourages buyers
* Saudi hits five-year high, breaks big chart barrier
* Kuwait slips but new cabinet seen positive
* UAE markets extend gains
By Nadia Saleem
DUBAI, Aug 4 Egypt's bourse surged to a five-month high on Sunday as signs that supporters of deposed president Mohamed Mursi might be willing to compromise with the interim government raised hopes for a political resolution after weeks of street violence.
A spokesman for a pro-Mursi delegation said it wanted a solution that would "respect all popular desires", a sign that supporters could be backing away from demands to reinstate Mursi.
Also, the weekend passed without major violence. Many investors had been concerned there could be more bloodshed if the army took action against Mursi supporters protesting on the streets; security forces shot dead 80 of them a week ago.
"There has been a slight fall in the political temperature in the past couple of days - we haven't seen really serious clashes such as those of early July," said Simon Kitchen, strategist at EFG-Hermes in Cairo.
"The investment outlook on Egypt is improving but remains volatile."
Cairo's benchmark index rose 2.9 percent to 5,530 points, its highest close since Feb. 26, making its largest one-day gain in nearly four weeks. Trading volume spiked.
The market may get a boost this week from the buyout of Orascom Construction Industries (OCI) ; OCI, previously Cairo's largest stock by market value, was removed from the main index last week after Dutch-listed OCI NV acquired more than 97 percent of the Egyptian firm in a cash-or-shares tender offer. OCI NV said the offer would be settled on Aug. 5; some of the money may go back into the stock market.
A surprise cut of the main official overnight interest rate in Egypt by 50 basis points late on Thursday also supported investor sentiment.
Egypt's pound continued to strengthen marginally on Sunday in the wake of the rate cut, though it was unclear how much the central bank was engineering the appreciation as a confidence-boosting measure.
Billions of dollars in Gulf aid promised since the army overthrew the president have begun to trickle into the currency market, easing pressure on the pound.
"Currency concerns have decreased for the short-term, but you won't see foreigners pile in," Kitchen added.
Local investors were net buyers of Egyptian stocks on Sunday while foreigners were sellers, bourse data showed.
The index appeared to stage a clean break of major technical resistance around the 5,450-point area, which capped it in May and July. The next major resistance is at the January peak of 5,884 points.
In Saudi Arabia, the index rose 0.8 percent to 7,972 points, its highest since September 2008. It closed above a major resistance at 7,944 points, the April 2012 peak; that is long-term bullish and leaves no major chart barrier before 8,782 points, the 61.8 percent retracement of the fall from January 2008.
Trading volumes were healthy despite the approach of Eid holidays later this week.
Sectors that benefit from local consumption led gains. The retail sector index and telecommunications rose 1.0 and 2.1 percent respectively; food and agriculture gained 1.5 percent.
With limited growth seen in heavyweight Saudi banks and petrochemical firms, investors are chasing mid-cap firms with higher growth outlooks.
In Kuwait, the index slipped 0.7 percent, trimming its 2013 gains to 35.4 percent. Investors are booking some profits from the rally, but many see the choice of a new cabinet on Sunday, after last month's parliamentary elections, as positive.
Mustapha al-Shamali was appointed oil minister, after serving as acting minister, and the finance ministry, which Shamali previously led, will now be headed by Sheikh Salem Abdul-Aziz al-Sabah.
"People believe this is a parliament that will rejuvenate the economy - it is also more inclusive of individuals with different political inclinations," said Fouad Darwish, head of brokerage services at Global Investment House.
Early last year Sheikh Salem resigned as central bank governor after 25 years in the post, complaining about a rapid rise in government spending. This suggests he could be something of a budget hawk in his new job.
However, with Kuwait still posting large budget surpluses, he is not expected to cut overall spending back, merely slow its growth moderately. In any case the new parliament, seen as willing to cooperate with the cabinet, is expected to give increased priority to long-delayed development projects to spur the economy.
Elsewhere, underpinned by strong second-quarter earnings, Dubai's measure rose 1.1 percent to a fresh 56-month high, while Abu Dhabi's index gained 0.2 percent.
Dubai engineering and maintenance firm Drake and Scull rose 2.6 percent in active trade. The firm was expected to post earnings later on Sunday or on Monday; five analysts polled by Reuters forecast a quarterly profit of 49.5 million dirhams, a 90 percent jump from a year earlier.
Doha's index climbed 0.6 percent to its highest close since September 2008.
* The index rose 2.9 percent to 5,530 points.
* The index rose 0.8 percent to 7,972 points.
* The index slipped 0.7 percent to 8,033 points.
* The index climbed 1.1 percent to 2,624 points.
* The index gained 0.2 percent to 3,931 points.
* The index advanced 0.6 percent to 9,765 points.
* The index gained 0.3 percent to 6,677 points.
* The index slipped 0.6 percent to 1,192 points.