Foreign investment in Egypt fell by $400 million in the first quarter compared with the same period in 2010 as political instability rattled investor confidence in the country, an official said on Wednesday.

Foreign investment in the first three months of 2011 came to $1.2 billion, Osama Saleh, the head of the General Authority for Investment (GAFI) said.

International investors withdrew funds from Egypt in the wake of a popular uprising that forced president Hosni Mubarak out of office and put a brake on economic growth.

Saleh said a fund worth LE1 billion would be set up to encourage investment in Egypt. Gulf states have agreed to shoulder some of the fund's cost, he said.

GAFI had said in April that Egypt approved investment incentives that will simplify procedures for new industrial projects and make it easier to set up franchises.

Egypt is faced with a yawning budget deficit, which is forecast to widen to 9.38 per cent of gross domestic product (GDP) in the 2011/12 fiscal year, the country's finance minister said earlier this week.