Egypt withdrew its ambassador from Israel on Saturday, saying that the killing of five Egyptian security personnel as Israeli forces pursued cross-border raiders was a breach of its 1979 peace treaty with the Jewish state.
The violence, following attacks inside Israel which killed eight Israelis, has sparked the gravest crisis in Israeli-Egyptian ties since Hosni Mubarak's overthrow in February.
Egypt "lays on Israel the political and legal responsibility for this incident, which constitutes a breach of the peace treaty between Egypt and Israel," the cabinet said in an official online statement.
The official news agency MENA said the Egyptian death toll in Thursday's violence had risen to five after two of seven wounded security personnel died of their injuries.
A few hundred Egyptians kept up a protest at the Israeli embassy in Cairo that began on Friday night, when they burned Israeli flags and tore down metal barriers. Banging on the barriers, they demanded the expulsion of the Israeli envoy.
The cabinet ordered the foreign minister to summon the Israeli ambassador and demand an official apology from Israeli leaders for statements accusing Egyptian military rulers of losing their grip on the Sinai peninsula.
A senior Israeli defense official said Israel sees its treaty with Egypt as a "fundamental element of existence."
"One thing is sure, there is not a single person in Israel who wants to harm an Egyptian policeman or soldier," Amos Gilad, a liaison officer with the Palestinians and Egypt, said on Israel Radio.
He said an investigation had not yet determined who had killed the Egyptian security personnel, adding that ties with Egypt were based on "dialogue and cooperation."
Israeli Prime Minister Benjamin Netanyahu was consulting cabinet ministers about a potential response, said an official who asked not to be named, referring to relations with Egypt.
Israel swiftly pinned the blame for Thursday's attack on a Palestinian group independent of Islamist Hamas and killed the faction's leadership in an air strike on the Gaza Strip on Thursday, and launched more than a dozen more raids on Friday.
Egypt has recalled its ambassador in Tel Aviv on previous occasions, such as Israel's 1982 invasion of Lebanon and heavy Israeli shelling of the Gaza Strip in 2000.
"The cabinet committee has decided to withdraw the Egyptian ambassador in Israel until the result of investigations by the Israeli authorities is provided and an apology from the Israeli leadership over the hasty and regrettable statements about Egypt is given," the cabinet statement said.
Israel has expressed concern about security in the Sinai peninsula and said the attackers infiltrated from the Hamas-run Gaza Strip via Egypt's Sinai desert, despite stepped-up efforts by Egyptian security to root out Islamist radicals.
Cairo rejected the charge it had lost control of Sinai and accused Israel of blaming Egypt for its own security failings.
The cabinet decisions followed a crisis meeting attended by army generals and Egyptian intelligence chief Murad Muwafi.
Egypt will take every precaution to secure its border with Israel to deter any infiltrators, and to respond to any Israeli military activity toward the Egyptian border, it added.
The Sinai forms a huge desert buffer zone between Egypt and Israel. Parts of their mountainous border remain porous.
The number of troops Egypt can deploy in the Sinai is limited under the peace treaty signed with Israel in 1979 after the two countries had fought four wars since 1948.
In 1994 Jordan became the only other Arab country to sign a peace treaty with Israel.
Emad Gad, senior researcher at Cairo's Al-Ahram Center for Political and Strategic Studies, said neither Egypt nor Israel was keen to escalate the issue further. "Withdrawing the Egyptian ambassador is a good step but Egypt still has to insist on a formal apology from Israel," he said.
The Cairo-based Arab League will hold an urgent meeting on Sunday to discuss Israeli air strikes on the Gaza Strip that killed 15 Palestinians after the attacks on Israel.
"The Arab League received a request from the Palestinian state ... and after negotiations it decided to host an urgent meeting on the level of the permanent representatives at 12 p.m. (5 a.m. EDT) tomorrow," said Director of Media and News Mahmoud Abdel Aziz, quoting the League's deputy secretary-general, Ahmed Ben Helli.