Since long before the Pyramids towered above the rich soil of this riverside town, Egyptians have given thanks to the muddy waters of the Nile. "Plants, animals, humans," said Ibrahim Abdel Aziz, a 45-year-old farmer, "we all come from this river." Trace the Nile about 2,250km upstream and there's a rising colossus that threatens to upset a millennia-old balance. There, in the Ethiopian highlands, one of the world's largest dams is taking shape. For Ethiopia, the dam promises abundant energy and an escape from a seemingly permanent spot in the lowest rungs of the world's human development index. But for Egypt, the consequences could be dire: a nationwide water shortage in as little as two years that causes crop failures, power cuts and instability resonating far beyond even the tumult of the recent past.

For a country facing daily domestic crises in the aftermath of its 2011 revolution, the dam is a foreign threat Egypt can ill afford. And that may be the point. Analysts say Ethiopia is seizing on Egypt's distraction and relative fragility to plunge ahead with plans that have long been on the drawing board but have always been thwarted by Egyptian resistance.

To Egyptians accustomed to thinking of their country as a powerhouse of the Arab world, the idea of bowing to a historically weaker African rival has been a sobering reminder of their nation's diminished clout. It has also been an early test for the year-old government of President Mohamed Morsi – one that critics say he has badly mishandled.

"Now the options are very few," said Talaat Mosallam, a retired major general in Egypt's army. Diplomacy is the first, but Egypt's leverage is "at rock bottom", he said, and if talks fail, Egyptian military commanders may decide that "it is better to die in battle than to die in thirst".

Indeed, the prospect of a water war has become a regular feature of Egyptian newscasts and front pages in recent weeks, ever since Ethiopia announced that it was diverting the river's course immediately after a meeting between Ethiopian prime minister Hailemariam Desalegn and Morsi in late May.

The announcement, which marked a milestone in the dam's progress, was seen in Egypt as a humiliating slap and an indication that Ethiopia has no intention to negotiate over the dam's construction.

Morsi responded last week by convening an emergency meeting of leaders from across Egypt's political spectrum, a move that backfired wildly when the presidency decided to broadcast the session live on television without telling most of the participants.

Thinking that they were conspiring in secret, the politicians hatched plans to arm Ethiopian rebels, launch a whispering campaign about Egypt's military might and send fighter jets to knock out the dam with one swift shot.

Morsi has not been so explicit, but he warned in a speech last Monday night that "all options are open" in protecting the river, which accounts for 95% of Egypt's water needs. The country, he told a crowd of cheering supporters, is ready to sacrifice blood to ensure that "not one drop" of the Nile is lost.

In an interview with Ethiopian state media last Tuesday, Hailemariam dismissed that as warmongering meant to distract from Egypt's domestic issues.

"I don't think they will take that option unless they go mad," he said. The same day, the Ethiopian foreign ministry said in a statement that the nation "will not even for a second" stop the dam's construction.

The standoff reflects the critical importance of controlling the region's water resources at a time of rapidly rising populations. Egypt and Ethiopia each have more than 80 million people, double the population that existed just 30 years ago. By 2050, the combined population of the two countries is expected to rise by 100 million, even as climate change could reduce the supply of water.

Nonetheless, Ethiopia has said repeatedly that the Grand Renaissance Dam won't cause a problem for Egypt. Ethiopian officials say the dam will be used to generate electricity, not to irrigate fields, meaning that all the water will eventually make its way downstream to Egypt.

Those officials see the dam as a chance to make right a colonial-era wrong that has preserved most of the Nile's water for Egypt while leaving little benefit for upstream countries.

Egypt may be the gift of the Nile, as the Greek historian Herodotus once remarked, but the Nile is not Egypt's alone. Eleven countries share the basin of the world's longest river, which winds through much of east Africa before emptying into the Mediterranean in northern Egypt.

Ethiopia has won the majority of those countries to its side with the promise of electricity exports for a region that desperately needs new sources of energy. It has even offered to sell some of the dam's 6,000 MW to Egypt.

Far from being soothed by Ethiopia's promises, however, Egyptians have become increasingly panicked. And with good reason, according to Mohamed Nasr Allam, a former water minister of Egypt.

Allam said that if Ethiopia goes ahead with its plans to build the dam on the Blue Nile – which accounts for the majority of the Nile's flow after converging with the White Nile in Sudan – Egypt could lose a quarter of its water.

"It will be a disaster for Egypt," Allam said. "Large areas of the country will be simply taken out of production."

Experts see the greatest peril for Egypt when Ethiopia fills the massive reservoir behind its dam, a process that could begin in 2015 and last as long as six years. Even afterwards, however, the creation of the dam will mean that Egypt no longer has direct control over its primary water source, a troubling prospect for a country that receives negligible rainfall and is considered the world's largest oasis.

Allam said Egypt should try to persuade Ethiopia to lower the 168-metre height of the dam, which would mitigate the effect. Ultimately, he said, international powers, including the United States, may be called in to help mediate.

The US state department has said that Egypt and Ethiopia, both American allies, should resolve the dispute through dialogue. But that dialogue would come at a time when Ethiopia's influence in the region appears to be rising and Egypt's is waning.

Hani Raslan, who heads the Nile Basin studies department at Cairo's al-Ahram Centre for Political and Strategic Studies, said it is no coincidence that Ethiopia announced plans to massively expand the dam and forge ahead with its construction just weeks after Egyptian president Hosni Mubarak was ousted in early 2011.

"Ethiopia has aspirations to be a regional power at Egypt's expense," Raslan said. "It is taking advantage of the instability after the revolution, especially now that there's a weak Muslim Brotherhood president with no experience whatsoever who is not in sync with the institutions of the state."

That's a common sentiment on the streets of Egypt, and on the Nile, where fishermen, farmers and boat operators remember the country's pre-revolutionary history with a heavy dose of nostalgia.

"When Mubarak was running the country, we didn't hear about electric outages or fuel shortages. And no one would dare say that they would cut the water of Egypt," said Abdel Arabi, 39, who sat on a tour boat watching sundown's rays glint off the Nile as birds swooped in for the evening's final catch.

For Abdel Aziz, a 45-year-old farmer, Ethiopia's plans mean that his extended family of 28, which supports itself on a 10th-of-a-hectare plot of corn, okra and eggplant fields, may go hungry.

"The water goes down, and it goes up," he said. "But now it may go lower and never come back again."

If it does, he said, there's no question of the outcome: "An even bigger revolution, worse than the last one."

This article appeared in Guardian Weekly, which incorporates material from the Washington Post