UPDATE 2-Europe shies away from cutting aid for Egypt
* EU to continue financing Egyptian civil society
* Bloc shies away from major aid cuts after bloodshed
* Cautious response shows Europe's difficulty in intervening
(Recasts with decision)
BRUSSELS, Aug 21 (Reuters) - The European Union stopped short of agreeing immediate cuts in financial or military assistance to Cairo on Wednesday, as the bloc's foreign ministers held emergency talks to find ways to help bring an end to violence in Egypt.
The decision acknowledges Europe's limited economic muscle in forcing Egypt's army-backed rulers and the Muslim Brotherhood supporters of deposed President Mohamed Mursi into a peaceful compromise.
It also reflects a concern that abruptly cutting aid could shut dialogue with Cairo's military rulers and damage Europe's ability to mediate in any future negotiations to end the worst internal strife in Egypt's modern history.
The European Union, seen as more neutral than the United States, which provides aid to Egypt's military, has emerged a key player in Egypt since the army deposed Mursi on July 3. The new government allowed the EU's foreign policy chief Catherine Ashton to become the first foreign official to see him in detention.
"The principles of our policy are to support democratic institutions, not to take sides," British Foreign Secretary William Hague told reporters after meeting his EU counterparts in Brussels.
"It is to continue to promote political dialogue and being able to maintain a position where we can continue to do that."
The ministers agreed to review any financial aid given to Egypt but said assistance to civil society would continue.
They also agreed to suspend exports to Egypt of any equipment that can be used for internal repression and review any arms sales, though stopping short of explicitly agreeing to end such trade.
"We want to continue to have a strong relationship with Egypt and to be able to offer our support, but we stand by the principles and values that we hold," Ashton told reporters after the meeting. "If we can be of assistance, we would do so."
Underscoring reluctance elsewhere in the West to take decisive action after violence in Egypt that has killed over 900 in the past week, the United States denied on Tuesday that any aid to Cairo has been cut but stressed that the army's bloody crackdown on protesters may influence their assistance.
Calls for tougher international action grew louder after the Egyptian authorities defied Western pleas for restraint and ordered the storming of camps of Mursi supporters in the past week.
Any European aid cuts would be tough to implement because the vast majority of its current assistance is directed at civil society groups and social programmes.
Direct budget assistance from EU institutions was stopped last year, and a 5 billion euro ($6.7 billion) package of grants and loans pledged last year hinges largely on democratic and economic reforms, which are lacking.
Blunting any impact of western aid cutbacks, Saudi Arabia has also pledged to plug any shortfalls.
Several EU governments have already implemented some cuts in assistance but privately, diplomats said, some are expressing concern that removing all security assistance to Egypt could damage the authorities' ability to address Islamist attacks in the lawless north Sinai region.
Britain has already suspended some joint work with the Egyptian security forces and revoked licences to export arms. Hague has said in the past the EU could not, however, rule out future assistance.
Egypt's main source of military assistance is the United States, which supplies its army with $1.3 billion a year, most spent to buy and maintain U.S.-made weapons.
Germany, one of the world's largest arms exporters, has provided millions of euros' worth of arms in recent years, though the government has stopped approving such sales since July. ($1 = 0.7476 euros)
(Additional reporting by Martin Santa, Barbara Lewis and Robert-Jan Bartunek in Brussels, William James in London; Editing by Will Waterman)