The discovery of a Hezbollah terrorist network in Egypt and reports of an Iranian plot to assassinate President Hosni Mubarak have left already strained relations between Egypt and Iran in tatters.

The developments have far-reaching implications for the region and for Israel’s conflict with Hamas in Gaza.

They highlight the divide between the pro-Western moderates in the Middle East, led by Egypt, and the Iranian-led radicals. The revelations have exposed the lengths to which the radicals are prepared to go in the struggle for regional hegemony and led to a severe deterioration in Egypt’s relations with Iran’s main proxies, the Lebanese-based Hezbollah and the Hamas regime in Gaza.

Cairo’s chief prosecutor is considering indicting Hezbollah leader Sheik Hassan Nasrallah for promoting seditious activities on Egyptian soil, and Egyptian forces have begun clamping down on arms smuggling into Gaza in a way they never have before.

According to the Egyptian media, the Hezbollah network in Egypt had been active for approximately two years. It was divided into three cells, each with a different assignment: one recruited Palestinians, Egyptians and other Arabs for terrorist attacks on Israeli tourists in Sinai; one focused on arms smuggling from Egypt to Gaza; and one aimed to destabilize the Egyptian regime.

A fourth group in Iran ostensibly was being trained to assassinate Mubarak but was disbanded when the Egyptians discreetly let the Iranians know they were aware of what was taking place.

The Hezbollah operatives in Egypt bought shops and apartments in key areas as cover for their activities: on the border with Sudan to bring in arms, in major cities to foment discontent, on the banks of the Suez Canal to monitor shipping, and in El Arish and Rafah to be close to the Gaza smuggling tunnels and to launch attacks on Israeli tourists in Sinai.

One of the Hezbollah cells apparently was meant to help bring Iranian weapons into Gaza from Sudan. Its operatives were to activate and oversee the Egyptian leg of an ambitious arms supply route from Iran to Sudan by sea or air, overland into Egypt, and then across Sinai and through the tunnels into Gaza. Some of the plans were foiled earlier this year when planes, reportedly Israeli, destroyed at least two arms convoys on their way to Egypt through the Sudanese desert.

The Egyptians say they thwarted plans by another cell to carry out a mega-terrorist attack against Israeli tourists in the Sinai similar to the simultaneous 2004 car bombings of the Hilton Taba and two other nearby resorts in which more than 30 Israelis were killed. The foiled attack apparently was planned as a large-scale retaliation for the assassination in Damascus last year of Hezbollah terrorist operations chief Imad Mughiyeh, for which the Lebanese-based militia blamed Israel.

The Hezbollah spy ring revelation underlines the common regional interests shared by Israel and Egypt. The result on the ground could be closer security and intelligence coordination in the ongoing struggle against Iran and its proxies. If this includes a strong Egyptian effort over time to stop arms smuggling through the border tunnels into Gaza, it would be a major leap forward in Israel’s overall game plan vis-a-vis Hamas in Gaza: to establish a long-term regime of peace and quiet based on deterrence.

So far, the Egyptians say they have arrested 49 members of the Hezbollah network and confiscated millions of dollars and ordnance destined for Gaza or earmarked for terrorist activities in Egypt. The leader of the ring, a Lebanese citizen and Hezbollah operative named Sami Shihab, reportedly was trained for the operation in Iran.

Even Nasrallah does not deny the basic Egyptian allegations. He has admitted that “brother” Shihab was a member of Hezbollah and that the organization had been operating a ring on Egyptian soil. But he denies it intended in any way to undermine the Egyptian regime. On the contrary, he claims the ring had only 10 members and that its sole goal was to help the Palestinians in Gaza.

“If helping the Palestinians is a crime, I officially admit my crime,” he declared April 10 on Hezbollah’s official al-Manar television station.

The Egyptians, however, dismiss Nasrallah’s claims out of hand. They recall how during the Gaza war Nasrallah called on the Egyptian people to rise up and overthrow the Mubarak government. That call, they say, was the signal for the clandestine Hezbollah ring to spring into action – except by then many of the operatives already had been arrested.

Whatever the case, the very fact that a Hezbollah ring was secretly active on Egyptian soil in itself constitutes a grave violation of Egyptian sovereignty. Members of Egypt’s Parliament are now calling for Nasrallah to be tried in absentia and, if found guilty, for Interpol to put out a warrant for his arrest. The government-controlled media have been scathing in their criticism of Nasrallah, calling him “the monkey sheik” and “the cuckoo in the Iranian clock.”

Nasrallah, although funded and armed by Iran, says he is a Lebanese patriot, not an Iranian agent. For its part, Iran claims the whole affair was cooked up by Egypt and Israel in an attempt to hurt Hezbollah’s chances in the Lebanese national election in June.

That may be one of the reasons the Egyptians have given the affair so much public play. But Egypt also is determined to remind President Obama not to forget, in his predilection for dialogue with Iran, that the Islamic Republic continues to threaten regional stability and pro-American governments. In other words, Obama should not forget his friends and allies as he tries to appease his foes.