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Mohammed Asad, File, Associated Press
FILE - In this Thursday, Dec. 29, 2011 file photo, workers from a non-governmental organization National Democratic Institute, or NDI, wait as Egyptian officials raid their office in Cairo, Egypt. Egyptian investigating judges on Sunday referred 43 NGO workers, including 19 Americans, to trial before a criminal court for allegedly being involved in banned activities and illegally receiving foreign funds, security officials said.

CAIRO — Egypt's ruling generals are playing a risky game of brinkmanship by cracking down on American nonprofit groups that promote democracy, threatening a relationship with Washington that has brought the military billions of dollars in aid over the past three decades.

The generals may be betting the U.S. cannot afford to cut relations with Egypt — a cornerstone of American Mideast policy. But the ruling military council may also fear it has much more than foreign aid to lose if it fully embraces a democratic transition that could bring civilian oversight of its substantial financial assets and curb its long-standing domination of politics.

Egypt on Sunday referred 19 Americans, including the son of U.S. Transportation Secretary Ray LaHood, and 24 other employees of pro-democracy nonprofit groups to trial before a criminal court on accusations they illegally used foreign funds to foment unrest in the country. The referral came one day after U.S. Secretary of State Hillary Rodham Clinton warned Egypt that failure to resolve the dispute may lead to the loss of American aid.

"I think we have to have every aspect of our relationship with Egypt examined until these people are removed from any indictment and allowed to leave or do whatever they need to do," Sen. John McCain, R-Ariz., the top Republican on the Senate Armed Services Committee, said in Washington.

The depth of the tensions was evident when an Egyptian government delegation abruptly canceled meetings in Washington with U.S. lawmakers set for Monday and Tuesday.

"We understand that we have a real strategic interest in keeping good relations with the Egyptians. It's the biggest country in the Arab world," said Sen. Joe Lieberman, I-Conn. "But on the other hand, we can't just sit back when Americans get charged and potentially incarcerated for what are trumped up charges, ridiculous," said Lieberman, who together with McCain spoke to reporters after a meeting with the Israeli foreign minister.

Senate Foreign Relations Committee Chairman John Kerry, D-Mass., admonished the Egyptians, calling their referral to trial a "slap in the face to Americans who have supported Egypt for decades and to Egyptian individuals and NGOs who have put their futures on the line for a more democratic Egypt."

Egypt and the United States have been close allies for more than three decades. But Cairo's campaign against the pro-democracy groups could seriously damage relations with far-reaching ramifications in a region already shaken by the political realignments arising from Arab Spring revolts.

The substantial U.S. military aid to Egypt is linked to its adherence to an American-mediated 1979 peace treaty with Israel, Washington's closest Middle East ally. The preservation of that cold peace has long been a foundation of U.S. policy in the Middle East.

In addition to $1.3 billion in U.S. military aid, Egypt also receives about $250 million in economic aid every year.

In return, Egypt transformed itself since the 1970s from a one-time Soviet ally hostile to the West into an anchor of U.S. policy in the region, fighting Islamic militancy, mediating in the tortuous Arab-Israeli peace process and assuming a key role in the U.S.-led war against terror.

"The ruling military council is playing a game of high-stakes poker, believing that the U.S. cannot afford to cut its relations with Egypt," said Ziad A. Fahmy, a Middle East expert at Cornell University. "However, even more important than the annual $1.3 billion in U.S. aid is the potential threat of democratic civilian oversight over the Egyptian military budget."

The U.S.-Egypt dispute began last month with raids by Egyptian security forces on 17 offices of 10 advocacy groups, denounced by the U.S. and other countries. It also reinforced charges by Egyptian protesters and activists that the military rulers who took over a year ago from Mubarak are perpetuating his regime's oppressive tactics.

"It is clear to all that this campaign ... aims to take revenge on groups that revealed violations by the military council since it took power," said a statement by the Arabic Network for Human Rights Information, a prominent Egyptian rights group.

The investigation into the work of the nonprofit groups is closely linked to the political turmoil that has engulfed the nation since Mubarak's ouster. The generals charge that the groups fund and support anti-government protests. They claim that "foreign hands" are behind the opposition to their rule and frequently charge that the protesters are receiving funds from abroad in a plot to destabilize the country.

The dispute between the military and the pro-reform groups has sharply polarized Egypt. And it has raised baffling questions about why the military rulers would risk so much just a few months before they plan to hold presidential elections and hand over power to an elected government at the end of a turbulent transition.

Much like their mentor Mubarak, the ruling generals have been deeply distrustful of the pro-democracy and human rights groups, which have energetically campaigned over much of the past year against the military's torture of detainees, the hauling of at least 12,000 civilians, many of whom protesters, before military tribunals and their perceived reluctance to dismantle the legacy of Mubarak's 29-year rule.

Some activists say they are preparing legal cases against the generals for the death of at least a 100 protesters since they took power and their human rights abuses. If such cases go to court, the generals could face charges similar to those for which Mubarak is on trial. He could face the death penalty if convicted.

"The issue of nonprofit groups itself is an old one and obviously fits within the broad narrative the SCAF (Supreme Council of the Armed Forces) is trying to construct about the root causes of continued mass mobilization and public protest," said Michael Hanna, an Egypt expert with the New York-based think tank the Century Foundation.

"Certainly placing blame upon outside forces and diverting attention from their own mismanagement is useful. But I do think it goes beyond that and that some within the SCAF believe that instability is a function of outside interference."

Authorities in Egypt have never been comfortable with nonprofit groups promoting rights and democracy operating in the country. That they are bound by law to register with authorities before they can operate and can only receive foreign funds through official channels have been the two main points of contention between the two sides.

London-based Amnesty International called on Egyptian authorities to drop the charges, saying they are based on "repressive" Mubarak-era laws that have been criticized by U.N. bodies for years.

"These international associations have become the latest scapegoats as the authorities desperately spin their story of foreign conspiracies," said Hassiba Hadj Sahraoui, Deputy Director of Amnesty International's Middle East and North African Program.

Amnesty urged the newly elected parliament, dominated by Islamists, to shoot down a newly proposed civil society draft law proposed by the military-appointed government which seeks to tighten the noose around the work of pro-democracy groups, and maintains restrictions on foreign funding and political activities of such organizations

The attacks on the nonprofit groups have never been as bad as they are now, even under Mubarak's authoritarian regime, something that analysts and activists claim to be a reflection of the generals' fear that the influence and privileges the military has enjoyed in the 60 years since army officers seized power in a coup could disappear in a truly democratic Egypt.

The military has over the past two decades built a large economic empire run by generals and kept well away from any civilian oversight. Over the past year, it has sought to win guarantees that SCAF members would not be prosecuted for any crimes committed during their tenure and that its hold on foreign policy and major policies would remain intact.

"Put rather simply, Egypt's fat cat generals have a lot more to lose than $1.3 billion if a true democracy, with budgetary oversight over the military, takes hold in Egypt," said Fahmy, the Cornell university expert. "SCAF will do everything within its power to stop this from happening."

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Associated Press reporter Donna Cassata in Washington contributed to this report.