(Reuters) - Israel, aiming to avoid further damage to its troubled ties with Cairo, said on Monday it saw the Egyptian termination of a deal to supply Israel with natural gas as part of a business rather than a diplomatic dispute.

Foreign Minister Avigdor Lieberman told Israeli radio stations the cancellation of the deal was "not a good sign," but added "We want to understand this as a trade dispute. I think that to turn a business dispute into a diplomatic dispute would be a mistake."

"Israel is interested in maintaining the peace treaty and we think this is also a supreme interest of Egypt," he said.

The Egyptian company EGAS confirmed on Sunday the termination of the 20-year-old contract, under which Egypt supplied 40 percent of Israel´s natural gas.

EGAS Chairman Mohamed Shoeib said the decision was not political, telling Egypt´s Hayat TV that "EGAS ended the deal because the other party didn´t fulfil its commitments".

Egypt was the first of two Arab countries to sign a peace treaty with Israel, in 1979, followed by Jordan in 1994.

Ties have been strained since President Hosni Mubarak, an advocate of the peace deal, was toppled by a popular revolt last year.

Israeli Finance Minister Yuval Steinitz voiced alarm on Sunday about the economic as well as diplomatic repercussions of the decision to end the contract.

The supply pipeline running through the lawless Sinai peninsula has been damaged repeatedly by saboteurs in the past year, causing extensive supply disruptions, and Israel had warned residents to expect electricity outages this summer.

Steinitz also said the Egyptian cancellation had set "a dangerous precedent which casts a shadow on the peace agreements and the peaceful atmosphere between Egypt and Israel".

(Additional reporting Dina Zayed in Cairo and Ari Rabinovitch in Jerusalem; Writing by Allyn Fisher-Ilan; Editing by Tim Pearce) (© Thomson Reuters 2012. 04/23/12)