"We are going to watch their commitment to the rights and dignity of every Egyptian," said Clinton. "We want to see Egypt move forward in a democratic transition, and what that means is you do not and cannot discriminate against religious minorities, women, political opponents."

The aid controversy grew from Egyptian authorities accusing U.S. pro-democracy groups of backing anti-government protests. Some of those Americans indicted in Cairo sought refuge in the U.S. embassy before finally being allowed to leave the country.

Freedom House Middle East director Charles Dunne is accused of using foreign funds to create instability in Egypt.

"What troubles me about the decision to waive is that it was taken without having first cut a deal with the Egyptians to end the NGO crisis. Which means we all are still under indictment," said Dunne.

Dunne says continuing to fund Egypt's military makes it harder for Washington to press for protections for civil society.

"Once you've told the Egyptians, as they have in effect, that this aid relationship will continue with no consequences, even if you are continuing to prosecute and repress NGOs, it makes it very difficult for the administration to come back and say wait, we've changed our minds," Dunne noted.

But many U.S. lawmakers say Washington's decades-long relationship with Egypt is more important than the civil society dispute. Middle East analyst Steve Heydemann agrees.

"If we are talking about opportunities to preserve American influence and the chance to put the U.S./Egyptian relationship on a solid foundation in the long term, I think it's very important at this very delicate stage of Egypt's transition not to take decisions because of very short term, transient kinds of differences of opinion between the two government," Heydemann said.

U.S. officials say they are focused on working with Egypt's new leaders to protect the rights of international and local civil society groups in a country where there has been more progress in the last 15 months than there has been in decades.