Egypt should not ban the Muslim Brotherhood or exclude it from the political process after the army's overthrow of Mohamed Morsi, the interim prime minister said, in a softening of state rhetoric against the group.
The apparent about-turn adds to speculation that the government is beginning to prepare for a possible political settlement to the country's crisis.
Hazem el-Beblawi proposed on August 17 that the Arab world's oldest and arguably best organised Islamist group should be dissolved, and said the government was studying the idea.
He made the proposal to the minister of social affairs, who is responsible for licensing non-governmental organisations.
In an interview with state media late on Tuesday, Beblawi said the government would instead monitor the group and its political wing and that the actions of its members would determine its fate.
"Dissolving the party or the group is not the solution and it is wrong to make decisions in turbulent situations," the state news agency MENA quoted Beblawi as saying.
"It is better for us to monitor parties and groups in the framework of political action without dissolving them or having them act in secret."
Founded in 1928, the Muslim Brotherhood was dissolved by Egypt's military rulers in 1954.
Though still outlawed during the 30-year rule of Hosni Mubarak, the group ran a charitable network and its members ran as independents in limited elections.
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After decades of operating in the shadows and winning support with its charities and preaching, the Brotherhood registered itself as a non-governmental organisation in March in response to a court case brought by opponents of the group who were contesting its legality.
It also has a legally registered political arm, the Freedom and Justice Party, set up in 2011 after the uprising that swept Mubarak from power.
The Brotherhood won all five national votes held since 2011, including Mohamed Morsi's election as president last year.
But Morsi alienated a huge swathe of the political spectrum during his year in power, and was removed by the army on July 3 after mass protests.
More than 1,000 people, including about 100 police and soldiers, have since been killed in the worst bout of violence in Egypt's modern history.
Most died when the security forces dispersed two pro-Morsi protest camps on August 14.
State media has described the crackdown as a war on "terrorism".
The military-backed interim government says it will call parliamentary and presidential elections within months, after the passage of a new constitution.