CAIRO (Reuters) - Egypt's stock market plunged on Sunday in its first day open since Islamist President Mohamed Mursi's seizure of new powers set off street violence and a political crisis, unraveling efforts to restore stability after last year's revolution.
More than 500 people have been injured in protests since Friday, when Egyptians awoke to news Mursi had issued a decree temporarily widening his powers and shielding his decisions from judicial review.
Mursi and the judiciary hinted at compromise to avert a full-scale political crisis.
The Supreme Judicial Council said Mursi's decree should apply only to "sovereign matters". Although it did not specify what that meant, its statement, read on television, suggested it did not reject his decree outright. It called on judges and prosecutors who have called for a strike to return to work.
Mursi's office repeated assurances that the measures would be temporary, and said he wanted dialogue with political groups.
"This declaration is deemed necessary in order to hold accountable those responsible for corruption as well as other crimes during the previous regime and the transitional period," the presidency said in a statement.
Justice minister Ahmed Mekky, who has said he has some reservations over Mursi's decree, launched an effort to mediate between Mursi and judges.
Sunday's stock market fall of nearly 10 percent - halted only by automatic curbs - was the worst since the uprising that toppled Hosni Mubarak in February, 2011.
Images of protesters clashing with riot police and tear gas wafting through Cairo's Tahrir Square were an unsettling reminder of that uprising. Activists were camped in the square for a third day, blocking traffic with makeshift barricades. Nearby, riot police and protesters clashed intermittently.
Mursi's supporters and opponents plan big demonstrations on Tuesday that could be a trigger for more street violence.
"We are back to square one, politically, socially," said Mohamed Radwan of Pharos Securities, an Egyptian brokerage firm.
Mursi's late Thursday decree marks an effort to consolidate his influence after he successfully sidelined Mubarak-era generals in August. It reflects his suspicions of a judiciary little reformed since the Mubarak era.
Issued just a day after Mursi received glowing tributes from Washington for his work brokering a deal to end eight days of violence between Israel and Hamas, the decree drew warnings from the West to uphold democracy. Washington has leverage because of billions of dollars it sends in annual military aid.
"The United States should be saying this is unacceptable," former presidential nominee John McCain, ranking Republican on the Senate Armed Services Committee, said on Fox News.
"We thank Mr. Mursi for his efforts in brokering the cease fire with Hamas.... But this is not what the United States of America's taxpayers expect. Our dollars will be directly related to progress toward democracy."
Forged out of the once-banned Muslim Brotherhood, the Mursi administration has defended his decree as an effort to speed up reforms that will complete Egypt's democratic transformation.
Yet leftists, liberals, socialists and others say it has exposed the autocratic impulses of a man once jailed by Mubarak.
"There is no room for dialogue when a dictator imposes the most oppressive, abhorrent measures and then says 'let us split the difference'," prominent opposition leader ElBaradei said on Saturday in an interview with Reuters and the Associated Press.
Floating one possible way out of the crisis, political scientist Moataz Abdelfattah said he had told Mursi's advisors that the president should issue an "explanatory memo" outlining what he would and would not do with the decree.
WARNINGS FROM WEST
Investors had grown more confident in recent months that a legitimately elected government would help Egypt put its economic and political problems behind it. The stock market's main index had risen 35 percent since Mursi's victory. It closed on Sunday at its lowest level since July 31.
Political turmoil also raised the cost of government borrowing at a treasury bill auction on Sunday.
"Investors know that Mursi's decisions will not be accepted and that there will be clashes on the street," said Osama Mourad of Arab Financial Brokerage.
Just last week, investor confidence was helped by a preliminary agreement with the International Monetary Fund over a $4.8 billion loan needed to shore up state finances.
Mursi's decree removes judicial review of decisions he takes until a new parliament is elected, expected early next year.
It also shields the Islamist-dominated assembly writing Egypt's new constitution from a raft of legal challenges that have threatened it with dissolution, and offers the same protection to the Islamist-controlled upper house of parliament.
"I am really afraid that the two camps are paving the way for violence," said Hassan Nafaa, a professor of political science at Cairo University. "Mursi has misjudged this, very much so. But forcing him again to relinquish what he has done will appear a defeat."
Many of Mursi's political opponents share the view that Egypt's judiciary needs reform. Mursi's new powers allowed him to sack the prosecutor general, a holdover from the Mubarak era who is unpopular among reformists of all stripes. But his liberal critics see the decree as a threat to democracy.
"What is confusing is that it seems the revolutionaries are meshing with the remnants of the old regime," said Nafaa.
(Additional reporting by Yasmine Saleh in Cairo and Philip Barbara in Washington; Editing by Peter Graff)
