CAIRO (Reuters) - A $12 billion loan by the International Monetary Fund to Egypt highlights the extent of the multilateral lender's re-engagement with the Middle East and the risks of a backlash against governments carrying out painful reforms return for the aid.

From the late 1980s through the Arab Spring uprisings in 2011, the IMF was vilified in the region as an agent of Western big business pressuring countries into austerity policies that impoverished their populations while benefiting foreign bankers.

After IMF-inspired spending cuts triggered riots in Algeria, Jordan and Sudan, many governments shunned cooperation with the Fund. At least one Egyptian minister privately compared it to British imperialists who seized the Suez Canal.

The loan to Egypt, approved on Friday, shows how much has changed. The IMF, touting a new, softer image, is now a key part of efforts to shore up many Middle East economies; as well as Egypt, it is providing billions of dollars of support to Iraq, Jordan, Morocco and Tunisia, and advising Algeria on reforms.

For the first time, it is also giving detailed advice on a large scale to rich oil exporters in the Gulf such as the United Arab Emirates and Kuwait, on issues including the introduction of value-added tax to boost non-oil revenues.

That is good news for investors, who are reluctant to put money into the region without the IMF's seal of approval. But it exposes the IMF and its partner governments to public anger if they fail to solve deep-rooted economic problems.

Mohsin Khan, who headed the IMF’s Middle East department from 2004 to 2008, said its re-engagement with the region was tricky because while the Fund knew how to fix state finances and external deficits, it was - like economists in general - less expert at reducing inequality and creating millions of jobs.

“Governments are undertaking difficult economic reforms. If after a few years they haven’t succeeded in improving living standards, people will point fingers," said Khan, now senior fellow at the Rafik Hariri Centre for The Middle East at the Atlantic Council in Washington.

The shift towards the IMF is partly due to huge economic pressure: the turmoil of the Arab Spring slashed investment in poorer countries while the plunge of oil prices from mid-2014 squeezed the Gulf's energy exporters.

In the past, poorer countries preferred loans, aid and migrant workers' remittances from the Gulf, which attached political conditions to its aid, to money from the IMF, which demanded tough economic reforms. By hurting the Gulf's finances, cheap oil has made that model unsustainable.

But the IMF itself has also changed. It is less insistent on dogma such as freeing currency rates, and more focused on reducing poverty and inequality, said Bessma Momani, senior fellow at Canada's Centre for International Governance Innovation, who is writing a book about the Fund.

For example, last week Cairo floated its currency and hiked fuel prices - classic IMF policies. But to limit the pain for poorer citizens, it plans - with IMF acquiescence - to boost spending on a consumer subsidy scheme and keep the price of bread flat, which will slow the drive to cut its budget deficit.

"I think we've learned," Masood Ahmed, who ran the IMF's Middle East department from 2008 until last month, said of its role in the Middle East.

In the past, the IMF sometimes focused solely on macroeconomic numbers such as deficits and growth rates; it now looks more at other issues which can affect the macro picture, such as poverty, he said.

After the Arab Spring, Ahmed mounted a public relations campaign to improve the IMF's image in the region, launching an Arabic-language blog to explain its policies and meeting frequently with politicians and journalists.

Reham El Desoki, senior economist at regional investment bank Arqaam Capital, said that partly as a result of such efforts, the IMF's ties with Egypt had changed since the 1990s.

"The relationship has developed. It’s more of a partnership than a carrot and stick relationship," she said.

Khan said the IMF had changed because it was shocked by the fragility of economies during the Arab Spring, as rapid growth rates evaporated and investment dried up overnight. "The Arab Spring had a humbling effect on the staff of the Fund."

So far, the IMF appears to have succeeded in avoiding the public outrage that marked many of its past forays into the region. Ordinary Egyptians are complaining about the fuel price hikes but few are blaming the Fund, and many say they understand the need for austerity.

Coming years may test that success, however. The three-year Egyptian loan may just be the start of a long-term financial burden; many economists think it will have to be renewed. Syria and Yemen will need aid when conflicts there eventually end.

Meanwhile, the IMF will be caught in the middle as governments in both oil importers and exporters cut back welfare benefits. Fuel prices are expected to rise further and new taxes to be imposed in many countries.

"This means the IMF can’t avoid political engagement in countries, exposing it to a backlash if economic transitions prove painful," said Momani. –Additional reporting by Tom Arnold in Dubai