UPDATE 4-Egyptian military says only dialogue can avert disaster

* Army statement not seen as prelude to intervention

* Opposition boycotts President Mursi's "national dialogue"

* Islamists say referendum must go ahead on Dec. 15

* Unrest ignited by Mursi's extra powers decree

CAIRO, Dec 8 (Reuters) - Egypt's military, stepping into a

crisis pitting Islamist President Mohamed Mursi against

opponents who accuse him of grabbing excessive power, said on

Saturday only dialogue could avert "catastrophe".

State broadcasters interrupted their programmes to read out

an army statement telling feuding factions that a solution to

the upheaval in the most populous Arab nation should not

contradict "legitimacy and the rules of democracy".

That sounded like a swipe at protesters who have besieged

the palace of the freely elected president and called for his

removal, going beyond mainstream opposition demands for him to

retract a decree that expanded his powers.

The statement also called for a "serious" national dialogue

- perhaps one more credible than talks convened by Mursi on

Saturday in the absence of opposition leaders. They insist he

must first scrap his Nov. 22 decree, defer next week's popular

vote on a new constitution and allow the text to be revised.

Deep rifts have emerged over the destiny of a country of 83

million where the end of Hosni Mubarak's 30 years of

military-backed one-man rule led to a messy army-led transition,

during which the Muslim Brotherhood and its allies won two

elections. Many Egyptians crave stability and economic recovery.

The spokesman for the main Islamist coalition demanded that

the referendum go ahead on time on the constitution drafted by

an Islamist-led assembly from which liberals had walked out.

The army, which ran Egypt for months after Mubarak fell in

February 2011, again cast itself primarily as the neutral

guarantor of the nation. A military source said there was no

plan to retake control of the country or its turbulent streets.

"DARK TUNNEL"

"The armed forces affirm that dialogue is the best and only

way to reach consensus," the statement said. "The opposite of

that will bring us to a dark tunnel that will result in

catastrophe and that is something we will not allow."

Mursi's office said the president opened his "national

dialogue" with about 40 political and other public figures

discussing "means to reach a solution to differences over the

referendum...and the constitutional decree".

Prime Minister Hisham Kandil told an Egyptian television

channel that the talks had led to creating a committee to review

Mursi's Nov. 22 decree and to work out legal ways to postpone

the referendum. He said a new decree could be issued.

"All options are on the table to reach consensus," he said,

adding that it was vital to take action to shore up Egypt's

economy that has been battered by the turmoil.

The main opposition coalition, the National Salvation Front,

which boycotted Mursi's dialogue repeated its call on Saturday

for scrapping the decree and the referendum on the constitution.

Instability in Egypt worries the West, especially the United

States, which has given Cairo billions of dollars in military

and other aid since it made peace with Israel in 1979.

The army might be pushing the opposition to join dialogue

and Mursi to do more to draw them in, said Hassan Abu Taleb of

the Al Ahram Center for Political and Strategic Studies.

He discounted the chance of direct military intervention,

adding: "They realise that interfering again in a situation of

civil combat will squeeze them between two rocks."

However, the military did seem poised to take a more active

role in security arrangements for the Dec. 15 referendum.

A cabinet source said the cabinet had discussed reviving the

army's ability to make arrests if it were called upon to back up

police, who are normally in charge of election security.

According to the state-run daily al-Ahram, an expanded

military security role might extend to the next parliamentary

election and, at the president's discretion, even beyond that.

The army issued its statement while protesters were still

camped out by the gates of the presidential palace.

The tens of thousands of Mursi foes who surged past tanks

and barbed wire to reach the palace gates on Friday night had

dispersed. But a hard core stayed overnight in a score of tents.

"LEAVE"

Some had spray-painted "Down with Mursi" on tanks of the

elite Republican Guard posted there after clashes between rival

groups killed at least seven people and wounded 350 this week.

Others draped the tanks with posters of Mursi and the word

"Leave" scored across his face in red letters.

"We are no longer calling for scrapping the decree and

delaying the referendum," Samir Fayez, a Christian protester at

the palace, said. "We have one demand in five letters: leave."

Nearby, a Mursi supporter named Mohamed Hassan was quietly

observing the scene. He suggested that the Muslim Brotherhood

and its ultra-orthodox Salafi Islamist allies could easily

overwhelm their foes if they chose to mobilise their base.

"The Brotherhood and Salafis by themselves are few but they

have millions of supporters who are at home and haven't taken it

to the streets yet," murmured the 40-year-old engineer.

The Muslim Brotherhood's supreme guide, Mohamed Badie,

denounced opposition protests that have swirled around the walls

of Mursi's palace, saying they "ruin legitimacy".

Badie said eight people, all of them Brotherhood members,

had been killed this week and urged the interior minister to

explain why police had failed to prevent assailants from

torching the organisation's headquarters and 28 other offices.

"Get angry with the Brotherhood and hate us as much as you

like, but be reasonable and preserve Egypt's unity," he told a

news conference. "We hope everyone gets back to dialogue."

The well-organised Brotherhood, which thrust Mursi from

obscurity to power, remains his surest source of support.

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