* Obama asks for $1.3 billion in military aid for Egypt
* He aims to assist democratic transition in Mideast
* Assistance for Israel holds steady at about $3.1 billion
By Susan Cornwell
WASHINGTON, Feb 13 The White House announced plans on Monday to help countries swept by "Arab Spring" revolutions with more than $800 million in economic aid, while maintaining U.S. military assistance to Egypt despite a crisis triggered by an Egyptian crackdown on U.S. democracy activists.
In a year marked by fierce debate over U.S. budget deficits, President Barack Obama sought to maintain the core of U.S. spending on overseas aid and development while squeezing savings out of existing programs and scaling back proposals to build new embassies and hire more diplomats.
In his annual budget message to Congress, Obama asked that military aid to Egypt be kept at the level of recent years - $1.3 billion - and sought $250 million in regular economic aid for the country as it makes its shaky transition away from autocratic rule following the overthrow of President Hosni Mubarak last year.
The proposals are part of Obama's budget request for fiscal year 2013, which begins Oct. 1. His requests need the approval of Congress. Some lawmakers have urged cuts to overseas spending to address U.S. budget shortfalls and are particularly angry at Egypt.
Obama proposed $51.6 billion in funding for the U.S. State Department and foreign aid overall, when $8.2 billion in assistance to war zones is included.
The White House sought a 1.6 percent increase in the State Department's budget, excluding spending for Iraq and Afghanistan, which was tallied up separately.
Most of the new economic aid for the Arab Spring countries - $770 million - would go to a new "Middle East and North Africa Incentive Fund," the president said in his budget plan.
Officials said the bulk of this would be new money, and would be spent on initiatives to support long-term economic, political, and trade reforms for countries in transition such as Egypt, Tunisia and Yemen.
'A NEW WORLD'
"We're in a new world. The Arab Spring has come," said Deputy Secretary of State Tom Nides, Secretary of State Hillary Clinton's chief budget official.
"We need to make sure we have the tools and flexibility in which to fund these initiatives. ... The world is evolving as we see it, and we felt it was important to have a pool of money."
Obama continued the practice of putting proposed foreign assistance for war zones in a separate account. This account, known as the "Overseas Contingency Operations," includes $8.2 billion for the State Department and foreign aid.
It includes $3.3 billion for Afghanistan, $1 billion for Pakistan, and $4 billion for Iraq, where U.S. troops have left the country but the State Department has picked up some of their functions such as police training.
Overall funding for Iraq declined about 10 percent from the 2012 fiscal year to $4.8 billion.
Assistance for Israel was steady at around $3.1 billion.
The new Middle East financing initiative builds on other programs, including up to $2 billion in regional Overseas Private Investment Corporation financing, up to $1 billion in debt swaps for Egypt, and approximately $500 million in existing funds re-allocated to respond to the region last year, the budget document said.
It did not say how the Middle East and North Africa Incentive Fund would be divided between countries, or give any other details of the plan.
'BE VERY CAREFUL'
In the U.S. Congress, where lawmakers are under pressure to slash budgets to address the vast U.S. deficit, one key Republican senator reacted cautiously to the plan.
"First, I'm not sure who'll we'll be negotiating with, and who you could give the money to. And there seems to be some awfully extreme views within the Arab Spring movement. I think we have to be very careful that any money we provide would be well spent," Senator Jeff Sessions, the top Republican on the Senate budget committee, told Reuters.
Egypt has long been among the top recipients of U.S. aid, getting about $1.6 billion annually, mostly in military assistance, reflecting the country's central role in the Arab world and its peace treaty with Israel, Washington's closest ally in the region.
In fiscal 2012, $250 million of aid approved for Egypt was economic, $1.3 billion was military and there was a $60 million "enterprise fund" approved by Congress.
But with the two sides at loggerhead over a crackdown by Egypt's military leadership on U.S.-funded pro-democracy groups, no U.S. assistance is moving to Egypt at the moment and a number of U.S. lawmakers have called for a halt to further transfers.
State Department spokeswoman Victoria Nuland said the United States still expected formal charges to be filed against some of the 19 U.S. citizens who were among 43 foreign and local aid activists barred from leaving Egypt due to its probe into foreign funding of pro-democracy groups.
"Over the course of many years we have considered security support for Egypt to be a good investment for the United States and a good investment for the region," Nuland said.
"That said, it doesn't change the fact that if we cannot resolve the current impasse it could have implications for this relationship and for our ability to disburse this money."