WASHINGTON—The Obama administration is set to suspend most financial assistance to Egypt, except aid targeted for counterterrorism operations and the defense of Israel, in an announcement expected as early as Friday, U.S. officials said.

The U.S. decision, while not a full aid cutoff, is likely to further strain Washington's relations with Cairo's military-backed government, as well as the Arab states that have showered Egypt with billions of dollars of new economic aid in recent months.

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