By Susan Cornwell and Arshad Mohammed
WASHINGTON (Reuters) - Secretary of State Hillary Clinton will allow U.S. military aid to Egypt to continue despite Cairo's failure to meet pro-democracy conditions, a senior State Department official said on Thursday, a move sharply criticized on Capitol Hill.
The office of Senator Patrick Leahy, who chairs the Senate subcommittee on foreign aid, revealed Clinton's decision and made clear his deep unhappiness with it, arguing that Clinton should now limit the amount of military aid that is released.
Clinton should "release no more taxpayer funds than is demonstrably necessary, withholding the rest in the (U.S.) Treasury pending further progress in the transition to democracy" in Egypt, Leahy said in a statement.
Hours later, a senior State Department official confirmed Clinton would on Friday waive a requirement, recently passed by Congress and authored by Leahy, for Egypt's government to support a transition to democracy in order for U.S. military aid to continue.
"On the basis of America's national security interests, she (Clinton) will waive legislative conditions related to Egypt's democratic transition, allowing for the continued flow of 'Foreign Military Financing' to Egypt," the official said.
The move reflects "our overarching goal: to maintain our strategic partnership with an Egypt made stronger and more stable by a successful transition to democracy," the official said, asking not to be named.
Since long-time Egyptian President Hosni Mubarak was toppled by a street revolution early last year, Egypt has made marked progress toward democracy. It has held parliamentary elections and is scheduled to elect a new president in May.
However, a crackdown on pro-democracy forces - including some U.S. groups - over the last several months infuriated U.S. lawmakers and caused the Obama administration to warn Egypt that its aid might be in peril.
Congress has approved $1.3 billion in military aid to Egypt - the same level the country has received for years - for the current fiscal year, which ends on September 30. Congress also approved $250 million in economic aid and up to $60 million for an "enterprise fund."
But for the U.S. military aid to flow, the law requires Clinton to certify that the Egyptian government is supporting a transition to civilian government, including holding free and fair elections, and implementing policies to protect freedom of expression, association, religion and due process of law.
Clinton is using a provision in the law that allows her to waive those conditions on national security grounds. Leahy said this sends the wrong signal to the Egyptian military, which has ruled the country since Mubarak was ousted.
"The Egyptian military should be defending fundamental freedoms and the rule of law, not harassing and arresting those who are working for democracy," Leahy said.
"They should end trials of civilians in military courts and fully repeal the Emergency Law, and our policy should not equivocate on these key reforms."
The State Department official argued that Egypt had made "more progress in 16 months than in the last 60 years" toward democracy. But the official allowed that "more work remains to protect universal rights and freedoms."
U.S. law also requires the Secretary of State to certify that Egypt is meeting its obligations under its peace treaty with Israel to receive any of the U.S. aid, and Clinton also made this certification, the State Department official said.
The Republican chair of the House of Representatives foreign aid subcommittee, Kay Granger, said she was disappointed Clinton had decided to waive conditions on military aid while the Egyptian government's transition was still underway.
The law still requires Clinton to consult congressional appropriators before any funds are transferred to Egypt, Granger added in a statement.
However, another Republican, Senator Lindsey Graham, said it was in U.S. national security interests to provide the aid.
"The United States military has a close working relationship with their Egyptian counterparts. These relationships proved to be invaluable and have been a stabilizing influence during these troubling and uncertain times in Egypt," Graham said.
Egyptian authorities recently accused U.S., Egyptian and other pro-democracy campaigners, including the son of U.S. Transportation Secretary Ray LaHood, of working for groups receiving illegal foreign funding, and initially prevented some of the Americans from leaving the country.
Most of the U.S. pro-democracy activists flew out of Egypt on March 1 after Egyptian authorities lifted a travel ban. But the charges have not been dropped against either the American or Egyptian activists, and trial is set for next month.
David Kramer, the president of Freedom House, one of the non-governmental organizations affected by the crackdown, said a resumption of military aid sends the wrong message to Egyptians.
The message is "that we care only about American NGO workers (who were allowed to leave), not about the aspirations of the Egyptian people to build democracy."
Brian Katulis, a senior fellow at the Center for American Progress think tank, said the Obama administration may be making a tactical move by keeping some aid going for now.
"They don't want to make any massive overhauls in our assistance until we have greater clarity for what the new Egypt looks like," he said.
(Reporting By Susan Cornwell and Arshad Mohammed; editing by Vicki Allen, Xavier Briand and David Brunnstrom)