UPDATE 2-Cabinet resignations deal setback for Egypt's Mursi

* Islamist minister, Christian parliamentarian resign

* President trying to forge consensus for painful reforms

* Islamists and their opponents bitterly divided

* Mursi and allies say Egyptians want end to squabbling

(Adds army chief's remarks, detail on Mubarak)

CAIRO, Dec 27 (Reuters) - An Islamist minister quit Egypt's

government on Thursday, the second cabinet resignation this

week, as President Mohamed Mursi tries to shore up his authority

and gather support for unpopular austerity measures.

An economic crisis and a battle over a new constitution have

underlined bitter divisions between Islamist-backed Mursi and

his liberal opponents and delayed a return to stability almost

two years since a popular uprising.

Rivals accuse Mursi, who won Egypt's first freely contested

leadership election in June, of polarising society by foisting a

divisive, Islamist-leaning constitution on the country and using

the autocratic ways of his deposed predecessor Hosni Mubarak.

Deadly violence preceded a referendum on the basic law,

dealing a blow to a struggling economy. Mursi's political rivals

refused to accept the result - the text won about 64 percent in

the vote - and they reject his call for national unity talks.

In a move that may pre-empt a planned reshuffle,

parliamentary affairs minister Mohamed Mahsoub announced he was

quitting because he disagreed with the slow pace of reform.

"I have reached a clear conclusion that a lot of the

policies and efforts contradict my personal beliefs and I don't

see them as representative of our people's aspirations," he said

in his resignation letter, which has yet to be accepted by the

prime minister.

Communications Minister Hany Mahmoud quit earlier this week,

citing his inability to adapt to the government's "working

culture".

Neither were major figures in the cabinet but their decision

to criticise the substance and style of Mursi's administration

suggests his decisions are unnerving not just opponents but also

some allies.

Earlier on Thursday, a Christian member of Egypt's upper

house of parliament, Nadia Henry, quit a day after the

Islamist-dominated chamber took over legislative authority under

the new constitution.

The charter crafted by an Islamist-dominated assembly is

meant to be the cornerstone of a democratic and economically

stable Egypt after decades of authoritarian rule. The opposition

says it does nothing to protect minorities.

Mursi says the constitution and an upcoming vote to re-elect

the lower house of parliament will help end squabbling among

feuding politicians.

He and his Muslim Brotherhood allies say ordinary people are

fed up with street protests that often turn violent and want the

government to focus on urgent bread-and-butter issues.

The strife has cast doubt on the government's ability to

push through the spending cuts and tax hikes needed to secure a

vital $4.8 billion International Monetary Fund loan.

The Egyptian pound tumbled to its weakest in almost

eight years against the dollar this week as people rushed to

withdraw savings from banks.

Egypt's defence chief said the army - which dominated Egypt

for decades and has wide ranging business interests - was ready

to step in to help the economy.

"The Egyptian economy is going through a very difficult

stage," Abdel Fattah al-Sisi was quoted as saying by state news

agency MENA. "The armed forces are keen to participate in

development and service projects in all parts of Egypt as part

of its promise to serve the great people."

CRISIS MODE

The resignations come ahead of a promised cabinet reshuffle.

Cabinet sources told Reuters as many as eight cabinet members

from second-tier ministries might go next week.

Mursi is also promising incentives aimed at making Egypt -

once a darling of emerging market investors - an attractive

place to do business again.

The 270-seat upper house, or Shura Council, holds

legislative authority until a new parliament is elected in early

2013. Opposition figures say they fear the Council could issue

laws curbing freedoms.

Henry represents Anglican Christians in Egypt. In a letter

published by state media, she said minority groups were not

represented properly in the chamber.

Her resignation underscores fears by Egypt's Christians, who

make up about a tenth of its 83 million population, about the

gains by Islamists since Mubarak was ousted in 2011.

Mubarak, who was sentenced to life in prison in June, was

moved to an army hospital on Thursday following a fall that

raised concerns about his fragile health.

Under pressure to acknowledge Egypt's diversity, Mursi

appointed 90 members including Christians, liberals and women to

the Council - alongside figures from the Muslim Brotherhood and

ultra-conservative Salafis - last week. Two-thirds of the upper

house were already elected in a vote this year.

"We stress again that the nation should achieve internal

reconciliation and forget its differences," the Muslim

Brotherhood's supreme guide, Mohamed Badei, told Egyptians in

his weekly message.

"Let's work seriously to end the reciprocal wars of

attrition. We urgently need to unify ranks and group together

and focus our capabilities and assets for the general benefit."

(Writing by Maria Golovnina; Editing by Tom Pfeiffer)

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