Israel's peace with Egypt is a regional bulwark that both countries are working to protect, Israeli Prime Minister Benjamin Netanyahu said on Thursday as protesters in Cairo kept up demands for a swift transfer from military to civilian rule.

The remarks underscored concern in an increasingly isolated Israel that Egypt's interim military rulers could be succeeded by a popular, Islamist-dominated opposition that resents Cairo's three-decade-old relations with the Jewish state.

This peace ensures the stability of the heart of the Middle East. It ensures orderly movement on what might be the world's most important shipping lane, Netanyahu told reporters, referring to the Suez Canal, over which Israeli and Egyptian forces frequently battled before their 1979 peace treaty.

It ensures economic stability and the potential for economic prosperity -- both of Egypt and of Israel, as well as of other countries in the region. It guarantees quiet, Netanyahu said.

We are acting together with Egypt to maintain the peace. We know that there are a great many elements which are trying to violate the peace, even as we speak.

Israel has been alarmed by the Arab Spring of revolts that swept the long-serving leaders of Tunisia, Egypt and Libya from power this year.

In a separate address to Israel's parliament on Wednesday Netanyahu reiterated a prediction that Arab political upheaval would become an anti-Western wave, and anti-liberal, and anti-Israel too, and ultimately an anti-democratic wave as well.

That outlook is cited by Netanyahu's conservative coalition government in explaining its reluctance to relinquish occupied West Bank land to the Palestinians, one of several disputes that have stalled a U.S.-sponsored peace process.

SINAI PRECEDENT

Egypt became the first Arab state to recognise Israel under a U.S.-brokered deal returning the occupied Sinai to Cairo. Netanyahu's critics accuse him of preferring to settle Israelis in the West Bank rather than make a similar land-for-peace deal that would pave the way for an independent Palestine.

The Sinai, a desert peninsula which long worried Israel as a gun-running conduit to Palestinian militants in the neighbouring Gaza Strip, has seen security fray further since the fall of Egyptian President Hosni Mubarak in February.

In August, infiltrators killed eight people in southern Israel and Israeli forces pursuing the gunmen killed five Egyptian border guards. The Netanyahu government apologised for the Egyptian deaths, but a mob stormed Israel's Cairo embassy the next month, forcing diplomats to evacuate.

The Israelis have since tried to cast Egypt's internal upheaval as having little long-term impact on bilateral ties.

Israel's armed forces were quick to deny a newspaper report that their intelligence chief had briefed Netanyahu's cabinet on prospects for an abrogation of the peace accord with Egypt.

In an example of the importance of direct contacts, the military said on Thursday it had received word from Egypt about an overnight clash between Sinai police and smugglers, near the site of a gunfight between Israeli troops and suspected smugglers on Israel's side of the border.

The incidents took place an hour apart and caused no crisis because of good communication between the countries, said Amos Gilad, a senior Israeli defence official.

Ultimately, the military liaison channels did an excellent job here ... At this of all times, we have to preserve the best possible relations.

(Writing by Dan Williams)