* Egypt targets militants after killing of 16 border guards
* Intelligence chief replaced, one of several changes
* Israel wants Egypt to get a grip on lawless border area
CAIRO, Aug 8 (Reuters) - President Mohamed Mursi sacked the
intelligence chief on Wednesday and Egyptian aircraft hit
targets on the border with Israel in the biggest assault in the
area in nearly 40 years after a deadly attack by militants on
Egyptian border police.
It was unclear how far Mursi - who must accommodate the
powerful army at home and reassure Israel that, as Egypt's first
Islamist president, he will maintain stable relations - had
expanded his authority in response to Sunday's attack.
But in a major shake-up, he sacked intelligence chief Mourad
Mwafi and announced other changes in security appointments.
He has also promised to restore calm to the Sinai region
after militants killed 16 Egyptian guards on Sunday and then
stormed through the border before being killed by Israeli fire.
It was the bloodiest attack on security forces in Sinai
since Egypt made peace with Israel in 1979.
Israel, which has been urging Egypt to deal with a growing
threat on its southern flank, voiced approval of the security
sweep.
Islamist militants opposed to the existence of Israel have
stepped up attacks on security forces on the border since the
overthrow of president Hosni Mubarak last year.
Many live among Bedouin tribes angry about being neglected
by Cairo; they are often Bedouin themselves but follow a
stricter interpretation of Islam, while also eschewing the
political Islam espoused by Mursi in favour of militant tactics.
Early on Wednesday, Egyptian aircraft struck at targets near
the border with Israel and troops raided villages, army
officials and witnesses said, in the biggest military assault in
the area since their 1973 war.
Egypt's military leadership said ground and air forces had
begun to restore stability in Sinai.
"The forces were able to execute the plan successfully. The
forces will continue the plan and calls on tribes and families
of Sinai to cooperate in the restoration of security," it said.
CRITICAL PHASE
Mursi, who took office in June, appointed Mohamed Shehata as
acting head of intelligence and sacked the governor of the north
Sinai region, presidency spokesman Yasser Ali told reporters.
Ali said Mursi also asked the head of Egypt's armed forces,
Field Marshal Hussein Tantawi, to appoint a new head of military
police, and named a new head of the presidential guard.
The changes were announced after Mursi held a national
security meeting that brought together Tantawi as well as the
prime minister and interior minister.
Analysts said it was unlikely Mursi would have been able to
make the changes without the approval of the army, which has
kept a tight grip on security policy since the overthrow of
Mubarak.
However, a security source said that Shehata, the new acting
intelligence chief, had a reputation under Mubarak for being
less of a regime loyalist and had been denied promotion as a
result.
Explaining the changes, spokesman Ali said Egypt was going
through a critical phase and it was necessary to protect "the
Egyptian revolution and the Egyptian will".
The fallout of Sunday's attack was the first major test of
how Mursi - from the Muslim Brotherhood - would balance the need
to maintain stable ties with Israel with his political affinity
with the Islamist Hamas movement ruling the Gaza Strip that
borders both Israel and Egypt.
Egyptian officials said the gunmen arrived via tunnels used
to smuggle goods into Gaza since the territory was cut off by
Israel. Egypt began work to seal them off on Tuesday, upsetting
Gaza residents who had expected better relations with Cairo
after Mursi's election.
Israel has long accused Palestinian militant groups of
crossing from Gaza to Egypt to team up with local militants with
the aim of attacking Israel's long border. Last August armed
infiltrators killed eight Israelis on the Egyptian frontier.
Egypt's military response - which focused on Shaikh Zuwaid,
a mud-brick settlement that relies heavily on profits from
smuggling goods and people into Gaza - appears to have reassured
Israel.
"What we see in Egypt is a strong fury, a determination of
the regime and the army to take care of it and impose order in
Sinai because that is their responsibility," a senior Israeli
defence official, Amos Gilad, said on Israel Radio on Wednesday.
Troops also entered al-Toumah village, 20 km (15 miles) to
the south, acting on information that militants were staying
there, army commanders in Sinai told Reuters. One said 20
militants were killed. A villager said he saw helicopters
chasing vehicles out of al-Toumah and heard rocket fire.
Mubarak's government worked closely with Israel to secure
the frontier region until he was toppled 18 months ago.
Mustapha Kamel Al-Sayyid, a professor of political science
at Cairo University, said the situation would now force Mursi's
administration to deepen contacts with Israel over security, a
step he had hoped to avoid, and restrict contacts with Hamas.
The Hamas prime minister of Gaza, Ismail Haniyeh, said there
was no evidence Gazans were involved in the latest violence.