UPDATE 7-Egypt military orders rival crowds to quit palace area
* Republican Guard says demonstrators must leave by 3 p.m.
* Mursi to address nation later in the day
* Violence has killed 7, wounded 350
* Egyptian pound hits 8-year low against dollar
CAIRO, Dec 6 (Reuters) - Egypt's Republican Guard ordered rival demonstrators to leave the area around the presidential palace on Thursday after fierce clashes that killed seven people, and Islamists began to comply.
The presidency announced that the Republican Guard, whose duties include protecting the palace, had set a 3 p.m. (1300 GMT) deadline for supporters and opponents of President Mohamed Mursi to quit an area they had turned into a battleground.
The military played a big role in removing President Hosni Mubarak during last year's popular revolt, taking over to manage a transitional period, but had stayed out of the latest crisis.
Mursi's Islamist partisans had fought opposition protesters well into the early hours during duelling demonstrations over the president's decision last month to expand his powers to help him push through a mostly Islamist-drafted constitution.
A Reuters witness said some of the hundreds of Mursi supporters who had camped overnight near the palace perimeter had started leaving before the Republican Guard's deadline.
The commander of the Guard, which has deployed tanks and armoured troop carriers to help police pacify the area, said the intention was to separate the adversaries, not to repress them.
"The armed forces, and at the forefront of them the Republican Guard, will not be used as a tool to oppress the demonstrators," General Mohamed Zaki told the state news agency.
Mursi himself, silent in the turbulence of the last few days, will address the nation later in the day, state television quoted a presidential adviser as saying.
After opposing crowds fought long into the night, the streets around the palace were much calmer in the morning, apart from the brief period of rock-throwing between the hundreds of Islamists and dozens of opposition partisans still at the scene.
STABILITY AT RISK
Army officers on the spot urged the combatants to back off and stop bloodshed that is further dividing Egypt and imperilling its quest for political stability and economic recovery nearly two years after mass protests overthrew Mubarak.
Officials said 350 people had been wounded, in addition to the seven deaths, underlining the scale of the conflict in the Egyptian capital and other cities, following bitter rows over Mursi's assumption of wide powers on Nov. 22 to help him push through a mostly Islamist-drafted constitution.
Six of the dead were Mursi supporters, the Muslim Brotherhood said. Each side blamed the other for the violence.
The Supreme Guide of the Brotherhood, to which Mursi belonged before he was narrowly elected president in June, appealed for unity. Divisions among Egyptians "only serve the nation's enemies", Mohamed Badie said in a statement.
With at least seven tanks at the palace corners, backed by about 10 armoured troop carriers and 20 police trucks, the two sides mostly shouted slogans at each other from a distance.
Mursi's opponents accuse him of seeking to create a new "dictatorship" with his Nov. 22 decree and were further angered when an Islamist-dominated assembly hastily approved a draft constitution due to go to a referendum on Dec. 15.
The president has defended his decree as necessary to prevent courts still full of judges appointed by Mubarak from derailing a constitution vital for Egypt's political transition.
Around the palace, traffic moved through streets strewn with rocks thrown during violence in which petrol bombs and guns were also used. Hundreds of Mursi supporters had remained there over night, many wrapped in blankets and some reading the Koran.
"We came here to support President Mursi and his decisions. He is the elected president of Egypt," said demonstrator Emad Abou Salem, 40. "He has legitimacy and nobody else does."
Opposition protester Ehab Nasser el-Din, 21, his head bandaged after being hit by a rock the day before, decried the Muslim Brotherhood's "grip on the country", which he said would only tighten if the new constitution is passed.
Another protester, Ahmed Abdel-Hakim, 23, accused the Brotherhood of "igniting the country in the name of religion".
The United States, worried about the stability of an Arab state which has a peace deal with Israel and which receives $1.3 billion in U.S. military aid, has urged dialogue. Britain also called for restraint and an "inclusive" political process.
Vice President Mahmoud Mekky proposed "personal ideas" for a negotiated way out on Wednesday, saying amendments to disputed articles in the constitution could be agreed with the opposition. A written agreement could then go to parliament, to be elected after this month's referendum on the constitution.
"There must be consensus," he told a news conference in the presidential palace as fighting raged outside on Wednesday. But the opposition stuck by its demand for Mursi to cancel the Nov. 22 decree and postpone the referendum before any dialogue.
But Mursi has shown no sign of buckling under pressure from protesters, confident that the Islamists, who have dominated both elections since Mubarak was overthrown, can win the referendum and the parliamentary election to follow.
As well as relying on his Brotherhood power base, Mursi may also draw on a popular yearning for stability and economic revival after almost two years of political turmoil.
The Egyptian pound plunged 4 percent on Thursday to its lowest level in eight years, after previously firming on hopes that a $4.8 billion IMF loan would stabilise the economy. The Egyptian stock market fell 4.4 percent after it opened.