In April, the State Department was said to have appealed to Egypt to stop the crackdown on the opposition Muslim Brotherhood during the campaign for municipal elections. Moreover, in late March, a U.S. Navy-contracted vessel in the Suez Canal opened fire on a boat deemed threatening. An Egyptian souvenir salesman was killed. Bush issued an apology for the shooting and pledged compensation. Still, the Egyptian parliament has been debating issuing an extradition request for the U.S. contractor. "Even if the bilateral relationship improves, Washington faces an uphill battle on certain key issues, especially with regard to politically empowering non-Islamist reformist elements, who have been even more harshly repressed than the Islamists," the report, titled "Electoral and Social Tensions Spike in Egypt," said. The report said the 80-year-old Mubarak, in power since 1981, was also expected to retire imminently. Mubarak's son, Gamal, was expected to succeed. "Taken together, these developments raise the specter of instability for a key U.S. ally," the report said. The Mubarak regime has been besieged by unprecedented labor unrest as well as a bread shortage. In March, nearly a dozen Egyptians were killed in fights while waiting for hours to buy subsidized bread. During a clash with striking workers at a textile plant in Mahalla Al Kubra, Egyptian police used live ammunition and rubber bullets, the report said. "After decades of repression -- and thousands of years of continuous dictatorship -- most Egyptians tend to be politically apathetic, a fact that has led many in Washington to take the perennial stability of this strategic and diplomatic ally for granted," Schenker said. "With a political transition on the horizon, however, the problems in Egypt suggest that Washington has more reason for concern than optimism."

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