Egypt has unilaterally canceled its agreement to supply Israel with natural gas, in a new indication of the steadily deteriorating relations between the countries.

Some leading Israeli politicians on Sunday characterized the cancelation as a major breach of the 1979 peace agreement, but the Israeli Prime Minister’s Office and Egypt’s ruling military leadership both described the move as “commercial” rather than “political” and said it was rooted in a dispute over interrupted supplies and payments, and that the matter was being handled by arbitration.

In contrast to the general Israeli reaction, Egyptian presidential hopefuls Abdel Moneim Aboul Fotouh and Hamdeen Sabahi both stated their satisfaction with the turn of events.

“The Egyptian people do not want to export gas to Israel and the president must act according to their wishes,” said Fotouh.

“I hope this decision is permanent in order for Egypt to better guard its national resources,” said Sabahi on his Twitter account.

Egyptian parties to the 2005 gas supply agreement claimed Israel had not paid its bills for the gas, while their Israeli counterparts slammed the Egyptians for failing to maintain a stable supply — the pipeline has been repeatedly sabotaged — and for moving unilaterally to end the deal.

Israel’s Finance Minister Yuval Steinitz called the move “very worrying,” and a dangerous precedent that cast a shadow over bilateral ties. Israel’s opposition leader Shaul Mofaz described it as “a flagrant breach” of the 1979 peace treaty. He said it plunged relations to “an unprecedented low,” and urged the US government — the guarantor of that treaty — to intervene.

Israel was also reported to have sought clarification from the Egyptian authorities over the issue — both via Egypt’s diplomats in Israel and its ambassador in Cairo.

But sources in the office of Prime Minister Benjamin Netanyahu played down the incident late on Sunday, suggesting the dispute was based on commercial disagreements and was not of a political nature, as the Egyptian gas company doesn’t deal directly with the Israeli government. A statement released late Sunday by Egypt’s ruling military council made the same point.

Israel’s Energy Minister Uzi Landau said it had been concluded two years ago that the supply from Egypt — which was a core component of Israel’s energy mix — was not reliable, and that Israel has been working to arrange alternate sources. Nonetheless, Israeli power suppliers have already warned of potential power cuts this summer, in part because of the problems with the Egyptian supply.

First reports indicated that the Egyptian Natural Gas Holding Company communicated its decision to scrap the deal to Israel on Sunday afternoon, but later reports said the move occurred on Thursday.

The head of the Egyptian company confirmed to the Associated Press that the contract had been terminated, for what he termed Israeli “violations” of contractual obligations.

Mohamed Shoeb said it was a business and not a political decision. He said Israel had not paid for its gas in months. Israel’s Foreign Ministry spokesman Yigal Palmor promptly denied that.

Egyptian saboteurs have blown up the gas pipeline to Israel 14 times since the uprising that ousted Hosni Mubarak last year. Many Egyptians feel the deal gives Israel bargain prices. Egypt’s parliament has called for the deal to be abrogated. Israeli officials said Egypt supplied only 25% of contracted gas in 2011.

The 1979 peace treaty provided for Egypt to supply Israel with oil. As Egypt’s capacity to do so dwindled, the relevant appendix was amended to apply to natural gas. Sunday’s decision represented a unilateral abrogation of an element of the overall treaty, Channel 2 reported, and thus was highly significant with respect to Israeli-Egyptian ties.

Relations between the two countries have been in the spotlight ever since the collapse of former president Mubarak’s regime at the start of 2011. Relations with Israel in general, and the gas supply deal in particular, have been criticized at mass protests and by would-be presidents alike.

Friction between the two countries has been evidenced by recriminations over instability in the Egyptian-controlled Sinai peninsula. Last August, Gaza-based terror groups infiltrated into Israel, presumably from Sinai, and killed eight Israelis; several Egyptian security personnel were also killed in the incident in unclear circumstances. Israel’s embassy in Cairo was subsequently stormed in mass protests at which Israel was accused of spilling Egyptian blood.

Earlier this month, a rocket fired from Sinai hit the Israeli resort town of Eilat. And just this weekend, Israel’s counter-terrorism bureau warned Israelis against vacationing in the peninsula, and urged those Israelis already there to come home, citing information on plans for kidnappings and terrorist attacks on Israelis there. Egyptian officials immediately responded that Israeli fears were unfounded, and that Israeli officials were seeking to harm the Egyptian tourism industry.

Days ago, in a document he sent to Prime Minister Benjamin Netanyahu, Foreign Minister Avigdor Lieberman branded Egypt a greater threat to Israel than Iran. “The Egyptian issue is much more disturbing than the Iranian problem,” Lieberman said during closed discussions on the topic, according to Ma’ariv Sunday. Lieberman reportedly believes that Egypt may violate its peace agreement and post more troops in the Sinai without permission.

For the long term, Israel is developing its own natural gas fields off its Mediterranean coast and is expected to be self-sufficient in natural gas in a few years.

Hussein Salem, a close friend of Mubarak was among the shareholders of East Mediterranean, the joint Egyptian-Israeli company that carries the gas to Israel.

Under the 2005 deal, the Cairo-based East Mediterranean Gas Co. sells 1.7 billion cubic meters of natural gas to the Israeli company at a price critics say is set at $1.50 per million British thermal units — a measure of energy.

On the Israeli side, EMG sought international arbitration in October because of the Egyptian side’s failure to supply the quantity of gas stipulated in the contract — because of the frequent bombings.

The gas deal has been the subject of litigation in Egypt. An appellate court last year overturned a lower court ruling that would have halted gas exports to Israel. Opposition groups that filed the suit before the uprising claimed that Israel got the gas too cheaply under the 15-year fixed price deal between a private Egyptian company, partly owned by the government, and the state-run Israel Electric Corporation.

Ibrahim Yousri, a former Egyptian diplomat who had brought the issue to court, welcomed the decision announced Sunday.

“It has become a scandal bigger than the (ruling) military council can withstand,” Yousri said. He said there are gas shortages in Egypt, and growing economic woes, further enflaming popular unrest. He called the business deal a “treason” to national interests, adding, “This is a great political step.”