* Mursi supporters prepare to defend protest camp
* Kerry says military was "restoring democracy"
* Muslim Brotherhood calls U.S. comment disappointing
* Human Rights Watch says Egypt must avoid "bloodbath" (adds Brotherhood reaction, Burns, new quotes)
By Maggie Fick and Noah Browning
CAIRO, Aug 2 (Reuters) - The United States gave its strongest endorsement yet to Egypt's new army-installed government, saying the military had been "restoring democracy" when it drove Islamist President Mohamed Mursi from office last month.
The Muslim Brotherhood decried the comments by U.S. Secretary of State John Kerry and said their supporters would carry on with protests calling for Mursi's reinstatement.
Thousands gathered at two Brotherhood camps in Cairo and prepared for a potential confrontation with security forces after the government warned they should give up or face action.
International diplomats, rights groups and Egyptian religious leaders appealed to authorities to avoid bloodshed.
Almost 300 people have died in political violence since Mursi was overthrown on July 3, including 80 of his supporters killed by security forces in clashes on July 27.
Mursi, who became Egypt's first freely elected president in June 2012, had faced weeks of demonstrations against his rule.
Many Egyptians were frustrated by his failure to get to grips with social and economic problems and feared he was leading the country towards stricter Islamist control.
Mursi is now in custody at a secret location.
The turmoil has left Egypt more polarised than at any time since U.S.-backed autocrat Hosni Mubarak was toppled in 2011.
NO MILITARY TAKEOVER
The new government gained a U.S. seal of approval late on Thursday when Kerry said the army had been "restoring democracy" when it toppled Mursi.
"The military was asked to intervene by millions and millions of people, all of whom were afraid of a descent into chaos, into violence," he told GEO TV in Pakistan.
"And the military did not take over, to the best of our judgment so - so far."
Kerry also called on the authorities to respect the right of peaceful protest, including the pro-Mursi rallies.
Washington had previously given mixed messages about events in Egypt, long a bulwark of its Middle East policy, although it studiously avoided calling Mursi's overthrow a "military coup".
Such a description would have triggered a cut-off in the $1.3 billion a year the United States gives Egypt's military.
Stepping up diplomatic efforts to defuse the crisis, U.S. Deputy Secretary of State William Burns will arrive in Cairo on Friday night and meet interim Foreign Minister Nabil Fahmy.
It was not known whether he would also hold talks with army chief General Abdel Fattah al-Sisi, the man who ousted Mursi.
Mohamed Ali Bishr, a senior Brotherhood leader and a minister in Mursi's former government, said the movement was disappointed by Kerry's statement.
"The United States is a country that speaks of democracy and human rights and they say something like that. I hope that they rethink their position and correct it," he told Reuters.
"AVOID A BLOODBATH"
European Union envoy Bernardino Leon, who is in Cairo trying to calm tensions, said on Thursday the EU would not easily accept the use of violence to break up the protest camps.
Human Rights Watch said the government should halt any plans to disperse the Muslim Brotherhood vigils by force.
"To avoid another bloodbath, Egypt's civilian rulers need to ensure the ongoing right of protesters to assemble peacefully, and seek alternatives to a forcible dispersal of the crowds," said Nadim Houry, HRW's deputy Middle East director.
It criticised security forces for using excessive force.
Political sources said there had been intense debate within the cabinet on the wisdom of sending in the security forces to clear the protesters.
Army spokesman Colonel Ahmed Ali said the military wanted no political role but was acting "to support the Egyptian people in their revolution".
In an interview with the London-based newspaper Asharq Al Awsat, he said people had the right to demonstrate peacefully but that Mursi supporters had acted violently.
At the Brotherhood's main Rabaa al-Adawiya camp, young men wearing crash helmets and brandishing sticks mounted a first line of defence behind barricades of sandbags and bricks.
Blood from last Saturday's shooting stained the ground.
"The Interior Ministry is practising the same oppressive policies of Mubarak," said Soha Osman, 40, a pharmacist from Alexandria, wearing a beige full-face veil.
Although the camps are now the focus of the power struggle, it was not clear whether the security forces would storm them imminently, especially during the Muslim holy month of Ramadan.
Kerry's statement of support for the army heightened worries among the Brotherhood's supporters.
"That's dangerous talk," said Abdullah el-Hendawi, 70, who was elected to parliament on the Brotherhood's Freedom and Justice Party ticket in the last election.
"We are here with our wives and children. We don't want violence," said Ali el-Shishtawi, a government employee. "We're not afraid. We're not terrorists like they say."
The new government's transition plan envisions parliamentary elections in six months, to be followed by a presidential vote.
Senior Muslim Brotherhood leader Essam El-Erian on Friday reiterated the Islamists' position that they will not deal with what they consider illegitimate new rulers to seek a solution. (Writing by Angus MacSwan; Editing by Alistair Lyon)