Egypt's cabinet said on Sunday that an Israeli statement expressing regret for the border deaths of five policemen was not enough but stopped short of saying if it would recall its Tel Aviv envoy.
"The Israeli statement was positive on the surface, but it was not in keeping with the magnitude of the incident and the state of Egyptian anger toward Israeli actions," the official MENA news agency quoted a cabinet statement as saying.
But the statement did not assuage more than 1,000 angry protesters outside the Israeli embassy, who celebrated when a man clambered up to the embassy on a top floor of a highrise, took down the Israeli flag and replaced it with an Egyptian flag.
The red, white and black flag of Egypt was illuminated in the night sky as the protesters lit up fire works and chanted "Long live Egypt!"
Military police in riot gear stood outside the building but did not try to disperse the protesters. The man who took down the flag escaped after he climbed down, witnesses said.
MENA said the cabinet insisted on a timetable for an Israeli offer of a joint investigation into the deaths on Thursday as Israeli troops pursued militants who carried out attacks earlier in the Negev that killed eight.
"Egypt affirms its solicitude for maintaining peace with Israel, but Israel must also assume responsibility for protecting this peace," it said.
Egypt became the first Arab country to sign a peace treaty with Israel in 1979.
But Israel remains deeply unpopular in the most populous Arab state and there have been growing calls for the treaty's revision since a February revolt overthrew president Hosni Mubarak, seen as a close ally of Israel.
On Saturday afternoon, the foreign ministry summoned Israel's charge d'affaires for a reprimand.
The envoy, who was summoned because the ambassador was outside the country, read out a statement by Israeli Defence Minister Ehud Barak expressing regret for the deaths and offering a joint probe, Egypt's foreign ministry said.
Egyptian state television had reported earlier in the day that Egypt would recall its ambassador from Tel Aviv, but Israel said it received no notification of the decision.
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Israeli foreign ministry spokesman Yigal Palmor said that "at no time has Israel been officially notified of a recall of the Egyptian ambassador."
Egyptian officials privately said discussions on the matter were still underway and that no decision had been reached yet. One official said Egypt would not recall its envoy.
After conflicting reports, Information Minister Osama Heykal was quoted by MENA as saying five policemen were killed "inside Egyptian territory as a result of an exchange of fire between Israeli forces and armed elements inside Israeli territory."
Israeli officials accused Palestinian militants in Gaza, which also borders Egypt, of planning the attack and carrying it out after slipping into the Negev desert from Egyptian territory.
Egypt has denied the gunmen used its territory and bristled at suggestions that it had lost control of the Sinai peninsula, where its military has been conducting a week long operation to root out Islamist militants.
Prime Minister Essam Sharaf also expressed his anger in a message on his Facebook page.
"Egyptian blood is too precious to be spilled for no reason," wrote Sharaf.
"Our glorious revolution took place so that Egyptians could regain their dignity at home and abroad. What was tolerated in pre-revolution Egypt will not be in post-revolution Egypt," he said.
If Egypt recalls its envoy, it would be the second time since the two neighbours made peace.
In November 2000 Egypt did so to protest an Israeli crackdown on a Palestinian uprising.
Following Mubarak's overthrow, some in Israel expressed fears that the government that followed him would listen to public calls and downgrade relations with the Jewish State.
Egypt's military, which took charge after Mubarak's ouster, pledged to honour the treaty.