By Paul Taylor
CAIRO (Reuters) - The European Union's foreign policy chief met Egyptian President Mohamed Mursi on Sunday against a backdrop of sectarian violence to encourage feuding political leaders to seek a national consensus in tackling mounting problems.
"This is a critical time for Egypt's transition. The country is facing huge economic and political challenges," Catherine Ashton said before the talks.
Highlighting political and sectarian tensions, clashes broke out between Coptic Christians and Muslims outside Cairo's main cathedral on Sunday after a funeral service for four Copts killed in an exchange of gunfire with Muslims north of the capital on Friday night. One Muslim was killed in that incident.
Egypt is in the midst of long-delayed negotiations with the International Monetary Fund on a $4.8 billion loan needed to cope with a growing economic crisis.
Foreign currency reserves have dwindled to less than three months' imports, the Egyptian pound has lost nearly 10 percent against the dollar this year and there are warnings of power cuts and fuel shortages this summer.
"More than ever, Europe - as a partner and neighbour - has to support Egypt in its move towards deep and inclusive democracy. I will work hard in Cairo to engage with all parties to help build confidence and find common ground on both political and economic issues," Ashton said.
She was due to meet six main opposition leaders later but EU diplomats said the prospect of a dialogue between the Muslim Brotherhood-led government and its liberal and leftist opponents had dimmed after recent political violence.
BATTLE OVER PROSECUTOR
The opposition accuses Mursi of seeking to monopolise power and muzzle independent media and civil society using the public prosecutor, the security forces and a controversial draft law to regulate non-government organisations.
Mursi's supporters say the opposition is trying to undermine his legitimacy and encouraging violence by refusing dialogue, threatening to boycott parliamentary elections and broadcasting hostile propaganda.
Police fired tear gas on Saturday to disperse activists of the April 6 pro-democracy movement that helped topple former president Hosni Mubarak in 2011, after they tried to storm the high court in a protest against the prosecutor general.
Egypt's top judicial body urged prosecutor general Talaat Ibrahim, appointed by Mursi last year, to resign voluntarily for the sake of the unity of the judiciary and return to his former job as a judge. An appeals court has annulled his appointment and ordered for his predecessor's reinstatement.
The prosecutor's removal has been a key demand of liberals, leftists and civil rights campaigners, who accuse him of bias by targeting independent media, opposition activists and critics of Mursi and his Muslim Brotherhood movement, such as popular television satirist Bassem Youssef.
The United States, which gives Egypt about $1.5 billion in annual aid, directed its sharpest criticism so far at the Islamist-led authorities last week, citing a "disturbing trend of growing restrictions on freedom of expression".
The European Parliament, in a non-binding resolution, urged the EU in March "not to grant any budgetary support to the Egyptian authorities if no major progress is made regarding respect for human rights and freedoms, democratic governance and the rule of law".
The resolution particularly criticised the treatment of Copts and women.
EU officials have said that if Egypt reaches a deal with the IMF, it can expect an additional $500 million in financial support from the EU and a similar amount from the United States.
(Writing by Paul Taylor; editing by Andrew Roche and Stephen Powell)