* Israel relies on Egypt for 40 percent of gas supply
* Egyptian denies decision is political
By Ari Rabinovitch
JERUSALEM, April 22 (Reuters) - Egyptian energy companies, citing a trade dispute, have terminated a deal to supply Israel with natural gas in a step that may further erode bilateral ties strained by a popular revolt that toppled Egypt's pro-Israeli leader last year.
An Israeli partner in the business made the step public on Sunday but an Egyptian firm said the decision to cancel the deal had been made on Thursday.
Israel, which relies on Egypt for 40 percent of its natural gas supply, worried about facing further energy cuts after a series of sabotage attacks on the pipeline running through the volatile Sinai peninsula contributed to shortages.
Israeli Finance Minister Yuval Steinitz expressed "great concern" about the suspension, saying it had set "a dangerous precedent which casts a shadow on the peace agreements and the peaceful atmosphere between Egypt and Israel".
Egypt was the first of two Arab countries to sign a peace treaty with Israel, in 1979, followed by Jordan in 1994.
The Egyptian decision was announced in Israel by Ampal-American Israel Corporation, partner in the East Mediterranean Gas Company (EMG), which operates a cross-border pipeline supplying gas to Israel.
Ampal said the Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company had told EMG they were "terminating the gas and purchase agreement".
The company gave no reasons for the Egyptian decision but said legal redress was under consideration.
"EMG considers the termination attempt unlawful and in bad faith, and consequently demanded its withdrawal," Ampal said in a written statement.
Mohamed Shoeib, chairman of the Egyptian company EGAS, confirmed the decision, saying the 20-year-old deal with Israel had been terminated on Thursday.
Shoeib told Egypt's Hayat TV that "EGAS ended the deal because the other party didn't fulfil its commitments".
The Egyptian decision followed a dispute over damages caused by a series of blasts on the pipeline supplying Israel, via the Sinai desert region on its border where lawlessness has risen since President Hosni Mubarak's overthrow in 2011.
Explosions have caused extensive disruptions in service in the past year, and Israel has warned residents to expect electricity outages in high demand summer months, and that it needed to speed up efforts to seek alternative supply lines.
Ampal and two other companies have been seeking $8 billion in damages from Egypt for not safeguarding their investment against the pipeline blasts.
It said EMG "initiated arbitration" against EGPC and EGAS last October, accusing the Egyptian firms of a "longstanding failure to supply the gas quantities owed".
Ampal said in its statement on Sunday that in light of the cancellation, EMG, Ampal and EMG's other international shareholders were "considering their options and legal remedies as well as approaching the various governments" concerned.
Shoeib denied the decision bore any diplomatic significance.
"It is a trade dispute not a political issue," he said.
Israel had to evacuate embassy staff in Cairo after riots there in September, an incident that highlighted threats to relations, though a new ambassador has since taken up residence in the Egyptian capital.