By Edmund Blair and Yasmine Saleh
CAIRO, Dec 9 (Reuters) - Egyptian President Mohamed Mursi has cancelled a decree that gave him sweeping powers and sparked violent unrest but did not delay this month's referendum on a new constitution that was a major demand of his opponents.
Islamist supporters of Mursi have insisted the referendum should go ahead on time on Dec. 15, saying it is needed to complete a democratic transition still incomplete after autocrat Hosni Mubarak's overthrow 22 months ago.
Ahmed Said, a leading member of the main opposition National Salvation Front said the decision to press ahead with the referendum was "shocking" and would deepen a political crisis.
"It is making things a lot worse," Said, head of the liberal Free Egyptians Party, told Reuters. "I cannot imagine that after all this they want to pass a constitution that does not represent all Egyptians." He said the Front would meet later on Sunday to give a formal response.
The announcement that Mursi had scrapped his Nov. 22 decree followed talks on Saturday that ran into the night at his presidential palace. Billed as a "national dialogue", the meeting was boycotted by his main rivals and had little credibility among protesters in the most populous Arab nation.
The April 6 movement, which helped galvanise street protests against Mubarak, said in a statement about the outcome of Saturday's talks: "What happened is manipulation and a continuation of deception in the name of law and legitimacy."
The constitution was fast-tracked through an assembly led by Mursi's Muslim Brotherhood and other Islamists. Liberals and others walked out, saying their voices were not being heard.
"A constitution without consensus cannot go to a referendum," said Hermes Fawzi, 28, a protester camped with dozens of others outside the presidential palace. "It's not logical that just one part of society makes the constitution."
Nearby were tanks and military vehicles of the Republican Guards positioned there to protect the palace after clashes in the past week between Islamists and their rivals killed seven people and injured about 350.
The military, which led Egypt through a turbulent interim period after Mubarak fell, stepped into the crisis on Saturday to tell feuding factions that dialogue was essential to avoid "catastrophe." But a military source said this was not a prelude to the army retaking control of Egypt or the streets.
After Saturday's talks, Mursi issued a new decree in which the first article "cancels the constitutional declaration" announced on Nov. 22, the spokesman for the dialogue, Mohamed Selim al-Awa, told a news conference held around midnight.
But he said the constitutional referendum would go ahead anyway next Saturday, adding that although those at the meeting discussed a postponement, there were legal obstacles to a delay.
The political turmoil has exposed deep rifts in the nation of 83 million between Islamists, who were suppressed for decades, and their rivals, who fear religious conservatives want to squeeze out other voices and restrict social freedoms. Many Egyptian just crave stability and economic recovery.
Islamists and more liberal-minded opponents have each drawn tens of thousands of supporters to the streets in rival rallies since the Nov. 22 decree. Mursi's opponents have chanted for his downfall while Islamists have said there is a conspiracy to bring down the nation's first freely elected president.
The National Salvation Front, whose members include Nobel Peace Prize laureate Mohamed ElBaradei and former foreign minister Amr Moussa, stayed away from Saturday's talks.
Ahead of stating its formal position, Front spokesman Hussein Abdel Ghani said: "My first personal impression is that it is a limited and insufficient step. We repeatedly said that among our top demands is for the referendum to be delayed."
Despite such opposition, Mursi is gambling he can push through the constitution via referendum with the backing of loyal Islamists and many Egyptians who are desperate to move on. Only after a constitution is in place can an election be held for a new parliament, expected about two months later.
The Islamist-led lower house of parliament elected this year was dissolved after a few months by a court order.
The new decree removed some parts of the old decree that angered the opposition, including an article that had given Mursi broad powers to confront threats to the revolution or the nation, wording opponents said gave him arbitrary authority.
Another article in the old decree had put beyond legal challenge any decision taken by the president until a new parliament was elected, reflecting Mursi's distrust of a judiciary largely unreformed from Mubarak's era.
That article was not repeated, but the new decree said "constitutional declarations including this declaration" were beyond judicial review.
The new decree outlined steps for setting up an assembly to draft a new constitution should the current draft be rejected.
Further, the opposition was invited to offer suggested changes to the new constitution, echoing an earlier initiative by Mursi's team for amendments to be discussed and agreed on by political factions and put to the new parliament to approve.
Amid the violence and political bickering, the army has cast itself primarily as the neutral guarantor of the nation.
"The armed forces affirm that dialogue is the best and only way to reach consensus," the military statement said. "The opposite of that will bring us to a dark tunnel that will result in catastrophe and that is something we will not allow."
The army might be pushing the opposition to join dialogue and for Mursi to do more to draw them in, said Hassan Abu Taleb of the Al Ahram Center for Political and Strategic Studies.
He discounted the chance of direct military intervention. "They realise that interfering again in a situation of civil combat will squeeze them between two rocks," he added.
But the military seemed poised to take a more active role in security arrangements for the approaching referendum.
A cabinet source said the cabinet had discussed reviving the army's ability to make arrests if it were called upon to back up police, who are normally in charge of election security.
According to the state-run daily newspaper al-Ahram, an expanded military security role might extend to the next parliamentary election and, at the president's discretion, even beyond that.