Egyptian dictator Hosni Mubarak refused on Saturday to bow demands that he resign, after ordering troops and tanks into cities in an attempt to quell an explosion of street protest against his 30-year rule.
Mubarak dismissed his government and called for national dialogue to avert chaos following a day of battles between police and protesters angry over poverty and political repression.
The unprecedented unrest has sent shock waves through the Middle East, and unsettled global financial markets on Friday.
Shortly after midnight, the army took control of Cairo's central Tahrir Square, which had been the focus for thousands of protesters trying to force their way to parliament.
More than 20 military vehicles moved into the square, blanketing the area. Protesters, who had earlier been fired at with teargas and rubber bullets, fled into side streets leaving the square empty except for the military.
"It is not by setting fire and by attacking private and public property that we achieve the aspirations of Egypt and its sons, but they will be achieved through dialogue, awareness and effort," said Mubarak, in his first public appearance, on state television, since unrest broke out four days ago.
Shots were heard in the evening near parliament and the headquarters of the ruling National Democratic Party was in flames, the blaze lighting up the night sky.
Mubarak said he was dismissing his government -- a move unlikely to placate many of the thousands who defied a nighttime curfew after a day of running battles with police.
The president made clear he had no intention to resign over the protests, triggered by the overthrow two weeks ago of Tunisian President Zine al-Abidine Ben Al Ben Ali after demonstrations over similar issues of poverty and liberty.
"There will be new steps toward democracy and freedoms and new steps to face unemployment and increase the standard of living and services, and there will be new steps to help the poor and those with limited income," he said.
"There is a fine line between freedom and chaos and I lean toward freedom for the people in expressing their opinions as much as I hold on to the need to maintain Egypt's safety and stability," Mubarak said.
REMINISCENT OF TUNISIA
"Mubarak is showing he is still there for now and he is trying to deflect some of the force of the process away from himself by sacking the Cabinet. In some ways, it is reminiscent of what Ben Ali did in Tunisia before he was forced out," Anthony Skinner, Associate Director of political risk consultancy Maplecroft, said.
"We will have to see how people react but I don't think it will be enough at all. I wouldn't want to put a number on his chances of survival -- we really are in uncharted territory."
Markets were hit by the uncertainty. U.S. stocks suffered their biggest one-day loss in nearly six months, crude oil prices surged and the dollar and U.S. Treasury debt gained as investors looked to safe havens.
"I think the next two to three weeks, the crisis in Egypt and potentially across the Middle East, might be an excuse for a big selloff of 5 to 10 percent," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati, Ohio.
Medical sources said at least five protesters had been killed and 1,030 wounded in Cairo on a day that saw security forces using rubber bullets, tear gas and water cannon to disperse crowds. Thirteen were killed in Suez and six in Alexandria.
Many protesters are young men and women. Two thirds of Egypt's 80 million people are below 30 and many have no jobs. About 40 percent of Egyptians live on less than $2 a day.
Elections were due to be held in September and until now few had doubted that Mubarak would remain in control or bring in a successor in the shape of his 47-year-old son Gamal.
Father and son deny that Gamal is being groomed for the job.
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