The United States is closely following the drama unfolding in Egypt unsure of President Mohamed Morsi's plans as thousands protested in Cairo against his power grab, U.S. officials said Tuesday.

The situation was evolving, State Department spokeswoman Victoria Nuland said, seeking to downplay fears that Islamist Morsi, elected after long-time leader Hosni Mubarak was toppled in 2011, was morphing into an autocrat.

Clashes erupted Tuesday between supporters and opponents of Egypt's President Mohamed Morsi in the Nile Delta city of Mahalla, amid a day of nationwide rallies against his assumption of broad powers.

A security official told AFP that both sides threw stones as the protesters enraged by Morsi's adoption of sweeping powers tried to storm the headquarters of the Muslim Brotherhood's Freedom and Justice Party, formerly headed by Morsi.

The International Monetary Fund on Tuesday said Egypt can still get its $4.8 billion loan agreed last week despite fresh political turmoil as long as there is "no major change" in its reform commitments.

The IMF also said that the funding, provisionally agreed on November 20, would also hinge on whether other bilateral lenders stick to their loan promises after President Mohamed Morsi issued a decree that granted himself sweeping powers.

Tens of thousands packed Tahrir Square on Tuesday to protest a power grab by Mohamed Morsi, piling pressure on Egypt's Islamist president as he faces his most divisive crisis since taking power in June.

The huge turnout in the iconic square in the heart of Cairo, as well as in the Mediterranean city of Alexandria and most of Egypt's 27 provinces, marked the largest mobilization yet against the president.

Significant welfare reform must be implemented across the Middle East and North Africa to satisfy the socio-economic demands of the Arab Spring, according to a World Bank-Gallup survey published on Tuesday.

Stronger "social safety nets" -- such as income support and temporary employment programs -- are needed in the region, where government fuel subsidies "benefit the non-poor to a much greater extent than the poor," it said.

The European Union announced Monday it was lifting its asset freeze on Egyptian and Tunisian funds, imposed as sanctions before the countries' strongmen rulers were ousted in the Arab Spring uprisings.

The EU's council of ministers said it had taken steps to "facilitate the return of misappropriated funds to the Egyptian and Tunisian authorities" now that Egypt's Hosni Mubarak and Tunisia's Zine El Abidine Ben Ali had been replaced by elected governments.

President Mohamed Morsi met senior judges on Monday to defuse a bitter dispute over a power grab that has worsened a political crisis in Egypt less than two years after its Arab Spring revolt.

The crunch talks came on the eve of planned protests by rival forces, although the Muslim Brotherhood party from which the president hails withdrew its call for a rally out of fears that it would spark more clashes.

Thousands of Egyptians on Monday turned out for the funerals of two Egyptian activists who were killed in separate clashes amid a political crisis that has polarized the country.

Thousands marched at the funeral procession of Gaber Salah, a member of the April 6 movement known by his nickname "Jika", who was critically injured in clashes near Cairo's Tahrir Square last week and died overnight.

Egypt's Islamist President Mohammed Morsi was to meet with senior judges on Monday in a bid to defuse a crisis that erupted after he assumed sweeping new powers, sparking strikes and deadly protests.

The crisis talks, on the eve of rival rallies which threaten to deepen the country's divisions, come a day after a member of his party was killed in clashes outside its offices in the Nile Delta town of Damanhour.

Egyptian President Mohamed Morsi said on Sunday that the sweeping new powers he assumed this week are meant to be temporary, and called for dialogue to find common political ground in the country.

"The presidency reiterates the temporary nature of the said measures, which are not meant to concentrate power, but... to devolve it to a democratically elected parliament... as well as as preserving the impartiality of the judiciary and to avoid politicizing it," a statement from his office said.