By Patricia Zengerle

WASHINGTON, July 23 (Reuters) - The U.S. Senate panel in charge of foreign aid proposed on Tuesday that funds sent to Egypt be kept at current levels, but that military aid be divided into four parts and conditions set on it, including that the Cairo government hold a democratic election.

The Senate State and Foreign Operations Appropriations Subcommittee approved the $1.3 billion in military aid to Egypt and $250 million in economic assistance that President Barack Obama requested for fiscal 2014, which starts Oct. 1, matching this year's level despite upheaval in the most populous Arab nation.

Washington has been grappling with how to handle the $1.55 billion it sends to Egypt each year since the military ousted elected Islamist President Mohamed Mursi early this month.

U.S. law bars aid to countries where there has been a military coup, but many U.S. officials want to preserve ties to Egypt's army and do not want to risk contributing to further upheaval in an important regional ally.

"We don't want a failed state in Egypt or a radical Islamic nation and I think we can avoid both by staying engaged with the military and the people of Egypt, but on our terms, not theirs," Republican Senator Lindsey Graham said.

The Senate plan would divide the aid into four blocks.

It would send one-fourth of the military aid immediately, but the next tranche would be conditioned on State Department certification that the Cairo government is supporting an "inclusive" political process and releasing political prisoners.

The rest of the aid would depend on a democratic election being held and a new government taking steps to protect the rights of women and religious minorities.

The overall draft spending bill for State Department and foreign operations approved by the Senate subcommittee totals $50.6 billion - $2.7 billion below this year's level, and $1.1 billion below Obama's budget request.

Among other things, the proposed Senate bill meets Obama's request for $3.1 billion in military assistance for Israel and sets $870 million for Jordan - including $200 million to help it deal with in influx of refugees from Syria's civil war.

It also includes $1.9 billion for Afghanistan - well below the $3.2 billion Obama requested. The senators also proposed a plan to cut aid to Afghanistan if the Kabul government pursues a plan to tax the United States for removing equipment from the country as it cuts back military operations there.

The plan from the Democratic-led Senate would spend $10 billion more than a bill in the Republican-controlled House of Representatives. The House plan would eliminate U.S. contributions to some international organizations, which the Senate seeks to continue.

The Senate bill will debated by the full Appropriations committee on Thursday, before eventually making its way to a vote by the full Senate. The House and Senate bills would have to be reconciled before going to Obama for his signature.