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* Army move to protect Suez shows canal's importance
* Handles tenth of world sea trade, fees fund Egypt
* Heavy security to ensure treaty on free passage to all
By Peter Apps, Security Correspondent
ABOARD RMS QUEEN MARY 2, Jan 29 (Reuters) - Egypt's army stepped forward on Tuesday from its new place in the shadows of the fledgling democracy and pledged to defend the state after a week of bloody street violence in cities along the Suez Canal.
It was a measure of the canal's place in Egypt's economy, and the world's, that army chief Abdel Fattah al-Sisi explained the military deployment ordered by President Mohamed Mursi in terms primarily of protecting a waterway he called a "vital strategic interest" - it handles about a tenth of all global trade by sea.
As the United States, sponsor of the armed forces, sounded an alarm on Monday, the Egyptian admiral who heads the state's Suez Canal Authority was completing a symbolic sail along its 192 km (120 miles) between Port Said on the Mediterranean and Suez on the Red Sea. "Traffic," he said, "is 100 percent safe".
Still bringing in over $5 billion a year in hard-currency tolls - more than two percent of national income - while unrest since the fall of Hosni Mubarak has hobbled tourism and undermined the pound, the canal has been generating massive income for Egypt since it was nationalised in 1956.
After the violence that has killed at least 52 people in the past week, mainly in Port Said and Suez, at either end of the canal, the authorities are keen to keep it that way, all too aware of past closures caused by war.
"The army's deployment in the two provinces of Port Said and Suez aims to protect the vital, strategic interests of the state, foremost among them the Suez Canal, which we will not allow to come to harm," General Sisi said on Tuesday.
The day before, the canal's managers issued a statement to reassure the owners of the 17,000 vessels that passed through last year carrying a record 740 million tonnes of cargo:
"In a strong, pacifying message to the world maritime traffic, Admiral Mohab Mameesh, chairman of the Suez Canal Authority, boarded two passing ships in the Canal for two days successively to assure that the traffic of ships in the Canal is 100 percent safe," the agency's English-language statement read.
The world's trading powers are also looking on anxiously, knowing that the cost of sending goods from Asia to Europe via South Africa would be a drain on a struggling economic recovery.
For now, at least, most shipping companies assume trouble will remain on shore and not trouble the canal's management:
"We feel pretty confident about Suez," Commodore Christopher Rynd, senior captain of Britain's Cunard line and master of the liner Queen Mary 2, told Reuters after passing through last week, before the riots. "It's simply so important to Egypt."
Last year, the volume of cargo transported exceeded levels set in 2008, shortly before the global financial crash and rise of Somali pirates reduced the number of ships passing Suez.
OPEN TO ALL
Built by French engineers and opened in 1869, the canal is governed by an international treaty, the 1888 Convention of Constantinople, by which its operators are bound to keep it open to civilian or military vessels in times of peace or war. The reality, however, has often been rather more complex.
In World War Two, Egypt's colonial master Britain denied access to Germany and its allies.
Gamal Abdel Nasser, the army officer who broke from colonial control, nationalised the waterway for Egypt in 1956. Britain and France attacked the canal zone with the support of Israel. Though U.S. pressure forced the invaders to withdraw, sunk and scuttled ships blocked the passage for several months.
The longest closure - eight years - was to come a decade later when Israel invaded the Sinai peninsula in 1967, turning the canal into a frontline buffer until 1975.
The need to maintain Egypt's 1979 peace treaty with Israel and keep the canal open, experts say, helped push the United States towards building a much closer relationship with those in power in Cairo over succeeding decades. Central to that was a colossal aid package direct to Egypt's military, widely seen as a major factor in helping Mubarak stay in power until 2011.
"The U.S. government does not have a long-term policy and strategy for U.S.-Egyptian relations," said Hayat Alvi, who specialises in the Middle East at the U.S. Naval War College.
"But I don't doubt that the U.S. is pressuring Egypt into a hands-off policy on the Suez. It's too critical for commerce and military transport and mobility."
So far, that "hands-off" strategy seems to be holding. As well as commercial shipping, warships from the United States, Israel and a range of others including Iran, Russia and China have used the canal in the last year without difficulty.
Gary Roughead, a former chief of U.S. naval operations and now at Stanford University's Hoover Institution, believes Egypt's newly elected Islamist rulers are trying to maintain the status quo on the canal: "I think they remain committed to its neutrality," he said. "Being free from bias with regard to who uses the canal, I believe, makes it much easier for them."
In the cities along the canal edge, there are angry complaints that local people get too little from the waterway, feeding into other resentments against leaders in Cairo.
"I don't feel any benefits from Suez Canal revenues," said Rasha Gharib, a 39-year-old government employee in Ismailia, which lies at the mid-way point and hosts the canal authorities' headquarters.
"The services of the Canal Administration benefit only its employees in terms of hospitals, social clubs and other services. This is despite the danger we could face due to any accidents in the waterway, since nuclear-powered ships pass through."
Mursi's government says it remains committed to the canal. It has announced a new investment plan. China's state-owned port operator Cosco Pacific already owns 20 percent of the Port Said Container Terminal. The Dubai Ports facility at Ain Sokhna, on the Red Sea near the canal's southern entrance, has expanded considerably.
With trade expanding and uncertainty still the rule after the Arab Spring, the Israeli government is looking to invest in offering an alternative Asia-Europe route, overland by rail.
On the canal itself, other coming investments include a Saudi-backed road bridge and a major Qatari-funded programme to expand gas, coal, steel and other facilities. In the cities, some complain Cairo is selling off a national treasure.
"What is happening in Port Said and Suez is not thuggery but the killing of the masses for uncovering the conspiracy to seize the Suez Canal and deliver it to non-Egyptian investors," said a statement from a youth coalition in Port Said issued this week.
Officials in Israel and Washington still complain Egypt's government has done too little to stop weaponry being smuggled across the canal, eventually to Palestinians in the Gaza Strip.
Western military officers, however, say Cairo still shows commitment to Western allies, notably in providing security for the passage of major warships, particularly aircraft carriers.
On its recent voyage from Europe to the Gulf, the Queen Mary 2, a leviathan of an ocean liner carrying 2,500 passengers on the first leg of a round-the-world cruise, formed up in a convoy at dusk off Port Said with some two dozen other vessels.
Shortly after midnight, a cluster of launches approached, pilots scrambled up rope ladders and the vessels slowly fell in line astern for the 12-hour passage to the Red Sea. The liner and cargo ships heading south passed a northbound convoy of a similar size in Great Bitter Lake in the interior.
Container vessels, which make up about half the tonnage using the canal, took the lead followed by three massive - and potentially explosive - liquefied petroleum gas (LPG) carriers.
Troops are a visible presence along the way; some wave at large ships from checkpoints. For Commodore Rynd on the Queen Mary 2, the Suez Canal remains a secure route: "But," he adds, "if we didn't think we could do it safely, we wouldn't do it." (Additional reporting by Shaimaa Fayed in Cairo and Yusri Mohamed in Ismailia; Writing Peter Apps and Alastair Macdonald)