CAIRO (Reuters) - In arid Egypt, officials have long angered fellow Nile Basin countries by clinging to colonial-era water treaties giving it rights to the lion's share of water flowing down the world's longest river.

But upstream nations desperate for development are hoping to break with the past, threatening to shut regional heavyweight Egypt out of a new pact and potentially deepening an already bitter struggle for water resources across this parched region.

"This is a crisis in Egypt's relations with Nile Basin countries," said Gamal Soltan, head of the Al-Ahram Centre for Political and Strategic Studies.

The feud could also upset the balance between poor upstream nations and Egypt, the Arab world's most populous nation, where climate change threatens a fragile farm sector and population growth may outstrip water resources as early as 2017.

The latest chapter in the long-running feud over waters from the Nile, worshipped as a deity in ancient Egypt, came when upstream countries declared after a water meeting in Sharm El-Sheikh this month that they would launch separate talks since Egypt and Sudan refused to revise water pacts dating to 1929.

"Egypt's historic rights to Nile waters are a matter of life and death. We will not compromise them," Moufid Shehab, minister of legal and assembly affairs, told parliament after the talks.

The 1929 deal, brokered on one side by British colonial powers in Africa, gives Egypt 55.5 billion cubic metres a year, the biggest share of a flow of some 84 billion cubic meters.

It also gives Cairo the power to veto dams and other water projects in upstream countries that include six of the world's poorest nations.

"We will not sign on to any agreement that does not clearly state and acknowledge our historical rights," Egyptian Water Minister Mohamed Nasreddin Allam said after the meeting.

But analysts say Egypt, eager to style itself as a leader of both Arab and African nations to enhance its global clout, must improve ties with upstream countries that in the future may take on greater economic and commercial importance.

"Egypt has tried in the past to complicate the issue ... They are dragging their heels," Shimeles Kemal, spokesman for the government of Ethiopia, source of the Blue Nile.

Egypt and Sudan "are pushing for a position that would negate everything we've achieved in years of talks and negotiations", said Isaac Musumba, Uganda's state minister for regional cooperation.

Upstream states have invited Egypt and Sudan to take part in the new deal -- whose legal standing would be uncertain -- but on their terms. "We hope to convince them," said Christopher Chiza, Tanzania's deputy minister of water and irrigation.

CLIMATE CHANGE

Talk of such a deal triggers alarm in Egypt, where Nile waters feed a farm sector accounting for a third of all jobs. Egypt, unlike upstream nations, cannot rely on rain and gets 87 percent of its water needs from the Nile.

Climate change and rising sea levels could also swallow much of the slim, fertile Nile Delta in Egypt, already the world's largest wheat importer, and cost it $35 billion this century, the United Nations has estimated.

Large-scale projects reclaiming arid land or building dams in upstream nations could further strain water use in Egypt, while increased upstream farming could bring more pollution.

But even if upstream countries ink the new deal, which could take place as early as May 14, they may not have the financial muscle in the near term to build dams and other projects that would allow them to siphon more water from the Nile.

"Practically, even if those countries sign a framework agreement without Egypt, its effects won't be lasting ... how are (upstream countries) going to stop the flow of water?" said Safwat Abdel-Dayem, secretary general of the Arab Water Council.

"It's premature to say they will build dams so we will lose water and (Egyptian) agriculture will be slashed," he said.

Globals donors and banks could be unlikely, for one, to provide the finance needed to build upstream water projects for fear of getting tangled in a regional diplomatic spat.

Analysts say a new treaty could nonetheless boost investments in African nations' land reclamation projects, and help attract foreign investment in upstream farmland.

"It would seem that a new deal, provided it covers an extended period and is enforceable, could be good for potential investors," said Aziza Akhmouch, an analyst with the Organisation for Economic Cooperation and Development.

"It would reduce current uncertainty about the future availability of water."

SOFT POWER

The conflict threatens to further dilute the sway of Egypt, perched at the nexus of Arab and African worlds, in the region.

"Egypt has lost a great deal of its influence in Africa, and has run (through) a lot of its cards," said Sharif ElMusa, a water politics expert at the American University in Cairo.

Egypt should not seek to stick to historic water treaties, it should focus on bilateral talks with each country or take its case to an international arbitrator, Soltan said.

"We need more holistic policies including other policy areas branching into economic, cultural, and political ties," echoed Osama Ghazali Harb, head of a liberal opposition party.

The government may be taking heed. It has pledged doubling funds for development projects with upstream nations.

It is also trying to enforce better management at home. Egypt has cut back on water-intensive crops like rice, a key export, but could see a 47 percent drop in maize output.

Experts say Egypt is not moving fast enough to cut its dependence on the Nile or shift the diplomatic focus from divvying up water to how to better use it across borders.

"If you can create larger benefits from the water, there are often opportunities to create a positive sum game," said Mark Giordano of the International Water Management Institute.