CAIRO, Feb 11 (Reuters) - Protesters enraged at President Hosni Mubarak's refusal to quit pledged to march from Tahrir Square to the presidential palace on Friday, raising fears of a confrontation between elite troops and demonstrators.
Tens of thousands of anti-Mubarak protesters assembled in Tahrir (Liberation) square ahead of noon prayers while troops in tanks and armoured vehicles stood by for what organisers billed as their biggest display of indignation in 18 days of protest.
In a statement read out on state television at midday, the military announced that it would lift a 30-year-old state of emergency according to the situation, but gave no time frame.
The statement said the military would also guarantee changes to the constitution as well as a free and fair election, and it called for normal business activity to resume.
Several dozen protesters also gathered outside Mubarak's palace on Friday, demanding he step down now and the army did not try to remove them, a Reuters witness said. Razor wire and six tanks and armoured vehicles separated them from the palace.
Down, down Hosni Mubarak! chanted the protesters, who had apparently been allowed to approach the palace in the suburb of Heliopolis. A sign delivering the same message was attached to razor wire blocking one of the entrances to the residence.
An increasingly sour confrontation in the uprising has raised fears of violence in the most populous Arab nation, a key U.S. ally in an oil-producing region where the chance of disorder spreading to other repressive states troubles the West.
Troops have promised to protect the right to demonstrate but a lengthening showdown over Mubarak's 30-year rule could test that resolve, with many Egyptians keen to end the economic disruption and the army keen to show it can impose order.
The armed forces are there to protect the demonstrators and to protect the country but the powers have been handed over, not to the military, but to the vice president, Finance Minister Samir Radwan said in an interview with Reuters, after concern the military could decide to resolve the crisis with a coup.
PROTESTERS PROMISE PALACE MARCH
A member of one of the youth movements behind the protests that erupted on Jan. 25 said the demonstrators would take over the palace. We'll have masses of Egyptians after Friday prayer to take it over, said Ahmed Farouk, 27.
The army has been neutral and did not harm any of us.
Protesters emerged from dozens of tents where they had bedded down for a night of frustration and disappointment, having turned up for a resignation speech only to hear Mubarak say he planned to hand over powers to his deputy.
He also said the transfer was in line with the constitution which leaves him in ultimate charge, and able to return.
We will march to the palace and oust Mubarak, and we know the world is on our side, said Nurhaan Ismael, a protester, 34.
The army is relaxed at the moment. They put barbed wire all around (the roads to the palace) but they know the will of the people will topple anything, Ismael told Reuters.
The national anthem played over the public address system at Tahrir Square ahead of noon (1000 GMT) prayers, after which the political rally demanding Mubarak bow out will start in earnest.
The higher council of the armed forces met and will issue a statement later, the state news agency reported. The council convened on Thursday under the leadership of Defence Minister and Deputy Prime Minister Mohamed Hussein Tantawi.
The army, from politically plugged-in generals to poor conscripts and junior officers, is key to what happens next.
This poses a real dilemma for the army, said Rosemary Hollis at London's City University. Are they going to allow the demonstrators to escalate their demonstrations so that they push the point that Mubarak has got to go, and that means the army definitely does split with Mubarak? The demonstrators are very disappointed and there will be violence.
Al Arabiya television said the council would issue an important statement in a short while, without giving details.
Mohamed ElBaradei, a Nobel peace prize winner and former U.N. diplomat who runs a liberal political movement, wrote on Twitter: Egypt will explode. Army must save the country now.
I think total chaos reigns within the regime. It is like the Titanic. The rats are leaving the sinking ship, ElBaradei, former head of the U.N. nuclear watchdog agency, told Austrian paper Die Presse in an interview published on Friday.
U.S. President Barack Obama sounded less than satisfied by Mubarak's latest concessions, saying he must explain changes he was making and do more to offer a path toward democracy.
For some hours on Thursday night there had been euphoria in Tahrir Square, after a military communique that many read as a prelude to an army move to strip the 82-year-old former air force commander of the power he has held for 30 years.
Some believed the pledge to protect the nation by a high command that is respected throughout Egypt was effectively a military coup designed to force the president's hand.
Rallies in Cairo and other cities turned festive expecting that Mubarak was about to resign in a televised address.
Within minutes of his broadcast starting, however, protesters were waving shoes and jeering in contempt as Mubarak launched into a lengthy explanation of his role in supervising a review of constitutional arrangements before he would quit, as he had said, at a presidential election due in September.
Vice President Omar Suleiman, a 74-year-old former intelligence chief who has maintained close relations with the United States and Israel, later appeared on television himself to promise a road map to democratic elections.
Even if delegated powers, Suleiman cannot dissolve parliament, request constitutional amendments or sack the cabinet according to article 82. There is a dispute over whether the president could hand him even those powers if he chose.
MUBARAK CALLS THE SHOTS
Demonstrators, who two weeks ago could scarcely have dreamed of winning such concessions, were not satisfied and said they would continue to press for Mubarak's immediate departure and an end to the military-dominated system in place for six decades.
Egypt's ambassador to Washington said it was clear that Suleiman was now de facto president. But Egyptian analysts said Mubarak still appeared to be able to call the shots.
Mubarak still holds the reins to power and he can easily and at any time retrieve presidential powers from Suleiman, said Hassan Nafaa, a commentator and government critic.
Washington's approach has been based on Egypt's strategic importance: a rare Arab state no longer hostile to Israel, the guardian of the Suez Canal linking Europe and Asia and a major force against militant Islam in the Middle East.
The United States has pressed Mubarak to speed the pace of reform but stopped short of demanding his resignation.