The Egyptian government’s hostile response to a US initiative to fund pro-democracy groups has strained America's relations with its biggest Arab ally during a critical transitional period for Egypt.

The tension has been building since March, when the US announced plans to distribute $65 million in grants directly to pro-democracy groups. But the angry and wide-ranging response from the Egyptian government and military, which has gone beyond typical Egyptian criticism of American foreign policy, has raised concern in Washington and underscored the challenge the US faces in navigating its relationship with a newly independent Egypt.

“During the Mubarak years, [officials] used anti-American rhetoric for public consumption all the time, and it had no real carryover into the private relationship,” says Michael Wahid Hanna, a fellow at the New York-based Century Foundation who just returned from a trip to Egypt. “But I do think this is significant and different and presents a challenge to how the US can operate in the region in terms of bilateral relations. … There’s real tension, and there’s no easy fix for it.”

The Egypt director of USAID, the US development agency that has been at the center of the storm here, left Egypt Thursday after less than a year on the job. But Lars Anderson, the agency’s spokesman in Washington, said his departure was not related to anti-American sentiment and was for “purely internal reasons.”

Top US diplomat portrayed as 'ambassador from hell'

When USAID first publicized plans to distribute the democracy grants, it invited US and Egyptian civil society organizations to apply. USAID held information sessions in Alexandria and Luxor as well as Cairo, providing information on how to apply for grants that would focus on areas like civic awareness and engagement, access to justice, and capacity building for political parties ahead of what are expected to be Egypt’s first free elections. In the Egyptian capital, a line of people waiting to get into the session stretched down the block.

Egyptian officials reacted with anger, saying that giving money directly to unregistered civil society organizations, bypassing the Egyptian government, was an affront to national sovereignty. A string of articles in state-run and independent newspapers denounced the foreign funding.

Soon the hostility had widened, with the generals currently in charge of Egypt whipping up xenophobic sentiment and accusing Egyptian activist groups of receiving foreign funding, inciting strife, and harming the nation. The Ministry of International Cooperation, led by Mubarak holdover Fayza Aboulnaga, announced it would investigate the aid recipients, and a judicial official said this week the probe had begun this week. (The ministry said Ms. Aboulnaga was not available to comment this week.)

By the end of July, as the incoming US Ambassador Anne Patterson arrived in Egypt to assume her new post, the cover of a state-run magazine depicted her using a wad of American dollars to light an American bomb in Egypt’s iconic Tahrir Square. “The ambassador from hell lights a fire in Tahrir,” read the caption.

The US responded publicly to the growing anti-American sentiment this week, saying the personal attacks against Ambassador Patterson were “unacceptable” and it has raised the issue with Egyptian officials.

“With regard to this kind of anti-Americanism that’s creeping into the Egyptian public discourse, we are concerned,” said State Department spokeswoman Victoria Nuland at a press conference in Washington. “We think this kind of representation of the United States is not only inaccurate; it’s unfair. We are very strong supporters of Egypt’s transition to a democratic future, and we will continue to be there for Egypt.”

'We don't need American help'

Egyptian government opposition to the USAID funding likely partly stems from a desire to have control over the money the US sends to Egypt – officials voiced criticism before when the Bush administration began directly funding civil society groups. And statements by Egypt’s generals denouncing activist groups sound like a smear campaign against organizations that have been a thorn in the military’s side for opposing its autocratic tendencies.

But Mr. Hanna says that military leaders aren’t just spreading propaganda – they believe it, too. His conversations with officials close to the military have led him to believe that the generals can’t comprehend how Egyptians could mobilize themselves, and so blame it on outsiders, accusing Israel and the US of fomenting conflict to keep Egypt weak. (Egypt's military itself receives about $1.3 billion in US aid each year.)

“There's obviously some cynicism involved. But there's also a pretty deep-seated belief that something's going on,” he says. “They can’t fathom non-Islamist mobilization. The mobilization just blew their minds and panicked them.”

But quite apart from official incitement against the US, many Egyptians and activists harbor a long-standing sense of national pride and resentment of foreign intervention that doesn’t need incitement. Having overthrown a dictator on their own, many don’t see a need for international funding, which some see as coming with strings attached.

"We don't need American help," says activist Mahmoud Hamdy, who participated in protests against the military government in Tahrir Square. He doesn't harbor ill-feelings toward the US, but sees foreign intervention as unnecessary. "We overthrew Mubarak with our own hands. And we will build the new Egypt with our own hands as well."

US officials taken aback by Egyptian reaction

Conscious of that sense of independence, US officials sought Egyptian input on what type of projects they should support with these new grants, holding multiple meetings with Egyptian activists and civil society leaders before putting out the request for proposals, and focusing on train-the-(Egyptian)-trainer sort of programs to minimize the American footprint.

“We wanted to get ideas from Egyptians,” said a US official familiar with the initiative. “We really did make a conscious effort to get a sense of what Egypt needs at the moment."

About 85 percent of the funding has gone to US-based organizations like National Democratic Institute and International Republican Institute to help bolster political parties ahead of parliamentary elections expected in November.

“There's nothing ideological about these programs, even the US-based ones.... It's just general training,” said the official. Most of the $65 million has already been disbursed. A larger number of smaller grants have gone to Egyptian-based civil society organizations.

The US did not expect the new Egyptian government to react the way it did.

"The decisions began to be made from the moment Mubarak stepped down – at that moment we suddenly saw what looked to us like, 'Well, OK, this is the revolution, it's being celebrated, this is a movement toward democracy, they're going to want training,'” says another US official. “We did not anticipate this reaction. We thought the mood was such that there would be more acceptance."

But critics say a more cautious approach would have been better. It’s unclear just how much of a difference USAID projects can make, particularly in the short time before elections, and the work they do may now be undermined by their association with the US.

Hanna says the US should “sit back and be subtle” in diplomacy during the transition. “There aren't any obvious ways that the US can influence the trajectory of the transition. And to the extent that we want to be assertive or activist, I think we run the risk of undermining these other goals that we have.”