Egypt rejects licenses for U.S. groups CAIRO (Reuters) - Egypt has rejected a request from eight U.S.-based civil society groups for licenses to operate in the country after a crackdown on their activities sparked the first diplomatic spat with Washington since the ousting of Hosni Mubarak. In a move that may damage Cairo's relations with Washington, the Insurance and Social Affairs Ministry rejected the applications because it believed the groups' activities violated state sovereignty, Egyptian state news agency MENA reported on Monday. It said requests from the Carter Center for Human Rights, set up by former U.S. President Jimmy Carter, Christian group The Coptic Orphans, Seeds of Peace and other groups had been rejected. "I don't understand how a charity group like the Coptic Orphans, which works with over 35 churches in Egypt to provide medical and social aid, was rejected," said the group's lawyer, Negad al-Borai. Sanne van den Bergh, field office director for the Carter Center in Egypt, said the group had not been formally notified of the decision to deny it a license "but we are aware of the media reports about it and we are looking into them." The Egyptian decision came on the same day that Interpol's headquarters in France refused a request by Egypt to issue worldwide arrest warrants for 15 employees of a number of U.S.-based non-governmental organizations that operate in Egypt. Interpol's statement said the request for arrest warrants for the 15, of whom 12 were Americans, was not in line with its rules that forbid "political, military, religious or racial" interventions. Under Mubarak, foreign-funded democracy and human rights groups were allowed to operate in Egypt but were kept in legal limbo by the government, which repeatedly turned down their applications for licenses. Under the military rulers who took over after Mubarak fell a year ago, Egyptian authorities have pursued an even tougher line, raiding NGOs' offices and pressing criminal charges against a number of Egyptian and foreign NGOs. Washington threatened to withdraw $1.3 billion in military aid until an Egyptian judge lifted a travel ban on several American democracy activists last month and allowed them to leave the country and avoid possible imprisonment. But just after the United States announced it was resuming aid to Egypt in March, Cairo asked Interpol to issue "red notices" for 15 other NGO workers who were not in Egypt when the charges against the organizations were made. One of the 15, American Charles Dunne, told Reuters in Washington on Monday that he was grateful for the U.S. government's efforts to get Interpol to quash the Egyptian request for global arrest warrants, but noted that the criminal case against the NGOs had not been dropped in Egypt. Everyone is still under indictment and the case is proceeding. The Egyptians are doing everything they can to escalate this and the confrontation with civil society more broadly," Dunne told Reuters. Dunne is a former U.S. diplomat who was based in Cairo from 1999-2002. He is now the Middle East director for Freedom House, which advocates for democracy and human rights worldwide. Twelve of the 15 whose arrest was sought by Egypt were American, two were Lebanese and one was Jordanian, Interpol said in its statement. Egyptian police raided the offices of Freedom House and other pro-democracy groups in late December. Prosecutors later charged 43 people including 16 Americans - one of them the son of U.S. Transportation Secretary Ray LaHood - with working for organizations that received illegal foreign funding. Tensions have since eased, but human rights campaigners say they fear the Egyptian decision announced Monday to deny them licenses may signal a new crackdown on their activities. "This decision is moving illogically and in opposition to the path of history as the entire world is magnifying the importance of civil society," said Hafez Abu Saeda, the head of the Egyptian Organization for Human Rights. The government insists on stifling civil work in Egypt. The military generals who took power after Mubarak are due to hand it to the winner of the presidential election at the end of June. Additional reporting by Shaimaa Fayed, Ashraf Fahim and Ali Abdelatti, and Susan Cornwell in Washington; Writing by Yasmine Saleh; Editing by Andrew Osborn and Dan Grebler