CAIRO  - Egypt's President Mohamed Mursi began his first full day in office on Sunday with his powers circumscribed by the military as he tries to pick a new cabinet to carry out his campaign pledges.

After being sworn in as the country's first freely elected civilian president on Saturday, Mursi formally received a transfer of power and pledge of support from the military.

But the 60-year-old's swearing-in ceremony took place at the constitutional court in Cairo, despite Mursi's wish that it take place before the now disbanded Islamist-led parliament.

The military dissolved parliament last month following a court order in what the powerful Muslim Brotherhood, from which Mursi stood down after his election, described as a "soft coup." Mursi on Sunday chaired a meeting of Egypt's outgoing cabinet led by Prime Minister Kamal al-Ganzuri who was named last year by the military and which has been asked to stay on in a caretaker capacity.

Official media said they discussed security issue and the economy, as Egypt signed an accord with the Saudi-based Islamic Development Bank for $1 billion in funding for the purchase of energy and food products. In Saturday's handover at Cairo's Hike Step base, Field Marshal Hussein Tantawi, the head of the Supreme Council of the Armed Forces (SCAF), vowed to support the Islamist Mursi. "We will stand with the new president, elected by the people," Tantawi said in a speech, in the ceremony ending the military led transitional period since Hosni Mubarak's overthrow in an uprising in February 2011. "I accept the transfer of power," Mursi said at the same base where members of the once-banned Brotherhood had faced military trials under Mubarak.

However, the ritual masked a political impasse ripe for future confrontation. The SCAF assumed legislative powers after it disbanded parliament and also formed a powerful national security council headed by the president but dominated by the generals.

The military also reserves the right to appoint a new constituent assembly should the one elected by the old parliament be disbanded by a court decision expected on September 1,

The military is also expected to want a say over sensitive ministries such as the defence ministry, headed by Tantawi, and the foreign ministry.

It had said the president would be able to appoint or dismiss any minister, but a Mursi aide told AFP before his inauguration there were still ongoing discussions with the generals on where their powers stop and Mursi's start.

An Israeli source said on Sunday that Prime Minister Benjamin Netanyahu had written to Mursi urging him to uphold the 1979 peace accord between their two countries and wishing him good luck.

The letter, first reported by Israeli daily Haaretz, "stressed Israel's desire to continue cooperation and to strengthen the peace," the source said on condition of anonymity.

Haaretz said Israeli officials had decided to put off attempts to organise a phone call between Mursi and Netanyahu, but said the Israeli leader had dispatched an envoy to meet Egyptian security officials.

But Mursi received a call on Sunday from Palestinian leader Mahmud Abbas, who thanked him for supporting the Palestinians, the official Egyptian MENA news agency reported.

Israeli President Shimon Peres, a Nobel peace laureate, also sent Mursi a message of his own on Sunday, his office said, in which he wrote that "contrary to war, peace is the victory of both sides."

Mursi has repeated that Egypt - the first Arab state to make formal peace with Israel - would respect its international treaties, in an allusion to the 1979 accord.

As president, he is not expected to radically change Egypt's foreign policy, especially towards Israel, in which the military is expected to exercise its clout.