(Recasts, adds Mubarak to go to military hospital)
* Mubarak release could exacerbate political crisis
* Army-backed government and Muslim Brotherhood in standoff
* Mubarak will still face house arrest
By Maggie Fick and Alistair Lyon
CAIRO, Aug 22 (Reuters) - Deposed leader Hosni Mubarak may leave jail on Thursday by court order after a week of bloody turmoil in which Egypt's new army-backed rulers cracked down on ousted President Mohamed Mursi's Muslim Brotherhood.
Mubarak's immediate destination will be the military's International Medical Center, a hospital northeast of Cairo, where he will remain under guard, according to his lawyer, as well as medical and security sources.
The prime minister's office said Mubarak, who ruled Egypt for 30 years until he was overthrown in 2011 as uprisings swept the Arab world, would be placed under house arrest.
That decision was made under a month-long state of emergency declared last week when police stormed protest camps set up in Cairo by Mursi's Muslim Brotherhood to demand his reinstatement.
About 900 people, including some 100 soldiers and police, have been killed in violence across Egypt since then, making it the bloodiest bout of internal strife in the republic's history.
Mubarak's imminent release dismayed some Egyptians. "Mubarak is a man who destroyed this country. And now he's going to walk free?" asked a man who said he was trying to find out if his brother, arrested on Saturday, was in Cairo's Tora prison, where the 85-year-old former president is held.
"Egypt is on the brink, and God knows where we are going," said the man with greying hair and a close-trimmed beard. He would not give his name, describing himself as a Mursi supporter but not a member of the Muslim Brotherhood.
He was among about 75 people queuing at the prison gate in scorching heat to visit family members inside. There were no anti-Mubarak protesters or reporters from Egyptian state media.
"WE LOVE MUBARAK"
Across from the gate, a score of visiting relatives sat in the shade along a high concrete prison wall, waiting their turn.
"We love Mubarak," said Mohamed Hussein, 36, who has no job. His sister Fatheya chimed in: "Isn't it enough that for 30 years he did not drag us into a war, and let us live in dignity?"
She said she had joined the anti-Mubarak revolt and had voted for Mursi, who won last year's presidential election.
Now she has changed her mind. "By God, I want Mubarak back," she said. Asked if she would prefer him or army chief Abdel Fattah al-Sisi, who ousted Mursi on July 3 after mass rallies against the Islamist president, she said: "Sisi. He's walking with God's orders."
Mubarak was sentenced to life in prison last year for failing to prevent the killing of demonstrators. But a court accepted his appeal earlier this year and ordered a retrial.
This week two court rulings in separate corruption cases removed the last legal grounds for his continued detention.
Mubarak is still being retried on charges of complicity in the killing of protesters during the revolt against him, but he has already served the maximum pretrial detention in that case.
The ailing former air force pilot probably has no political future and will not be allowed to leave Egypt, with his assets remaining frozen.
Political upheaval has gripped Egypt since Mursi's overthrow. The military's declared plan for a return to democracy has yet to calm the most populous Arab nation, where security forces impose a nightly curfew as they hunt down Brotherhood leaders.
The clampdown appears to have weakened the Arab world's oldest and arguably most influential Islamist group, which won five successive votes in Egypt after Mubarak's fall.
"FRIDAY OF MARTYRS"
The Brotherhood's ability to mobilise pro-Mursi demonstrations has faded in the past few days. One of its spokesman, Ahmed Aref, was arrested early on Thursday, the state news agency reported.
But Brotherhood supporters have called on Egyptians to hold "Friday of Martyrs" marches against the army takeover.
A pro-Mursi alliance called the National Coalition to Support Legitimacy said in a statement: "We will remain steadfast on the road to defeating the military coup."
Mubarak's release would play to the Brotherhood's argument that the military is trying to rehabilitate the old order. The army-installed government casts its conflict with the Islamist movement as a struggle against terrorism.
Alarmed by the bloodletting, the United States and European Union are reviewing their aid to Cairo, but Saudi Arabia, a foe of the Brotherhood, has promised to cover any shortfall. Gulf Arab states have already pledged $12 billion since Mursi was removed.
The EU stopped short of agreeing immediate cuts in financial or military assistance to Cairo on Wednesday, as its foreign ministers held emergency talks on Egypt.
The decision acknowledges Europe's limited economic muscle in prodding Egypt's army-backed rulers and Mursi's Brotherhood towards compromise. It also reflects a concern that halting aid could shut off dialogue with Cairo and damage Europe's ability to mediate in any future negotiations on the crisis.
The government has repeatedly denounced outside meddling. "Egypt can never accept interference ... in its internal affairs," said Foreign Minister Nabil Fahmy after the EU talks "The only standard that rules Egypt's decisions is the supreme interest of the country and its national security." (Additional reporting by Cairo bureau; Editing by Michael Georgy and David Stamp)