An Egyptian Health Ministry spokesman said the death toll in violence outside the Cairo headquarters of the Republican Guard stood at 42, with 322 people injured after the Muslim Brotherhood accused the security forces of attacking protesters there, NBC News reported on Monday.
The Egyptian military said "a terrorist group" had tried to storm the building. A military source described the attackers as "armed Muslim Brotherhood elements", saying they had tried to storm the building at dawn.
The bloodshed deepened Egypt's political crisis, escalating the struggle between the army, which overthrew Morsi last Wednesday after mass demonstrations demanding his resignation, and the Brotherhood, which has denounced what it called a coup.
As an immediate consequence, the ultra-conservative Islamist Nour party, which initially supported the military intervention, said it was withdrawing from stalled negotiations to form an interim government for the transition to fresh elections.
Al Jazeera's Egypt news channel broadcast footage of what appeared to be five men killed in the violence, and medics applying cardiopulmonary resuscitation to an unconscious man at a makeshift clinic at a nearby pro-Morsi sit-in.
A Reuters television producer at the scene saw first aid helpers attempting mouth-to-mouth resuscitation on a dying man. Wounded people were being ferried to the field hospital on motorbikes, given first aid treatment and taken away in ambulances.
The military overthrew Morsi on Wednesday after mass nationwide demonstrations led by youth activists demanding his resignation. The Brotherhood denounced the intervention as a coup and vowed peaceful resistance.
Military vehicles sealed off traffic in a wide area around the Rabaa Adawia mosque where Morsi supporters led by senior Brotherhood leaders have been staging protests since his ouster.
The army also closed two of the main bridges across the Nile River with armoured vehicles, witnesses said.
Talks on forming a new government were already in trouble before Monday's shooting, after the Nour party rejected two liberal-minded candidates for prime minister proposed by interim head of state Adli Mansour.
Nour, Egypt's second biggest Islamist party, which is vital to give the new authorities a veneer of Islamist backing, said it had withdrawn from the negotiations in protest at what it called the "massacre at the Republican Guard (compound)".
"We've announced our withdrawal from all tracks of negotiations as a first response," party spokesman Nader Bakar said on Facebook.
The military can ill afford a lengthy political vacuum at a time of violent upheaval and economic stagnation in the Arab world's largest nation of 84 million people.
Scenes of running street battles between pro- and anti-Morsi demonstrators in Cairo, Alexandria and cities across the country have alarmed Egypt's allies, including key aid donors the United States and Europe, and Israel, with which Egypt has had a U.S.-backed peace treaty since 1979.
At least 35 people died in violence on Friday and Saturday in fresh turmoil that came two and a half years after autocratic ruler Hosni Mubarak was toppled in a 2011 uprising.
(Read More: With Military Takeover, What Now for Egypt?)
While Sunday was calmer, the sight of huge crowds numbering hundreds of thousands gathering in different parts of Cairo was a reminder of the risks of further instability.
The army appeared to be counting on exhaustion and the onset of the Muslim fasting month of Ramadan from Tuesday to wear down the Brotherhood protesters.
However, even before Monday's incident, many were determined to hold out and die for their cause if necessary.
Hanim Ahmad Ali Al-Sawi, 55, spent Sunday encamped outside the Republican Guard barracks where Morsi has been helped since the coup.
"We will not leave until Morsi returns. Otherwise we'll die as martyrs," she said, as soldiers and policemen looked on from behind barbed wire. She had been there with her five children for the last three days in spite of the scorching heat.
For many Islamists, the overthrow of Egypt's first freely elected president was a bitter reversal that raised fears of a return to the suppression they endured for decades under autocratic rulers like Mubarak.
On the other side of the political divide, hundreds of thousands of Morsi's opponents poured into Cairo's Tahrir Square, the cradle of the popular uprising to oust him.
On Sunday night, a carnival atmosphere took hold, and a troupe of folk musicians played darabukka drums and mizmar flutes as others danced and let off fireworks.
The army has denied it staged a coup, saying instead it was merely enforcing the will of the people after mass protests on June 30 calling for Morsi's resignation.
People blamed the Brotherhood for economic stagnation and said it was trying to take over every part of the state, an accusation the movement stringently denies.
Washington has not condemned the military takeover or called it a coup, prompting suspicion within the Brotherhood that it tacitly supports the overthrow.
(Read More: Egypt Stocks Surge on Relief After Morsi Ouster)
Obama has ordered a review to determine whether annual U.S. assistance of $1.5 billion, most of which goes to the Egyptian military, should be cut off as required by law if a country's military ousts a democratically elected leader.
But U.S. lawmakers said that was unlikely to happen.
"We should continue to support the military, the one stabilizing force in Egypt that I think can temper down the political feuding," U.S. Representative Mike Rogers said on CNN's "State of the Union".
Egypt can ill afford to lose foreign aid. The country appears headed for a looming funding crunch unless it can quickly access money from overseas. The local currency has lost 11 percent of its value since late last year.
The governor of Egypt's central bank, Hisham Ramez, flew to Abu Dhabi on Sunday, officials at Cairo airport said, following Egyptian media reports Cairo was seeking financial aid from Gulf states after Morsi's removal.
Egypt's foreign reserves fell $1.12 billion in June to $14.92 billion, representing less than three months of imports.
Only about half are in the form of cash or in securities that can easily be spent, and the IMF considers three months to be the minimum safe cushion for reserves.