CAIRO (AFP) ― Egypt’s first democratically elected president Mohamed Morsi began selecting a new government on Monday as his supporters pursued a sit-in to pressure the ruling military to hand over full powers to the Islamist.

After a tight race in which Morsi was forced to reach out to pro-democracy groups, the politician who resigned from the Muslim Brotherhood to take the top job is expected to include ministers who will have the support of his movement’s election allies.

Despite the historic victory in which Morsi was on Sunday declared the first civilian president of Egypt, he still has to contend with a ruling military seeking to retain broad powers and with a precarious economy.

The Muslim Brotherhood that fielded Morsi in the election to replace ousted leader Hosni Mubarak has said it would carry on with a sit-in to pressure the ruling generals to relinquish more powers to Morsi.

On Monday, Morsi, once a prisoner under Mubarak’s regime, was moving into the presidential palace and had already begun talks to appoint his new cabinet, days before the military is scheduled to transfer power, a spokeswoman said.

“He has already started, with a list of names he is considering. He says he will declare the cabinet soon,” said Nermine Mohammed Hassan, a campaign spokeswoman.

State television showed images of the bearded 60-year-old sitting at a desk in the presidential palace, and others of Morsi sitting next to military ruler Field Marshal Hussein Tantawi during a visit to the military’s headquarters.

The military-appointed cabinet offered its resignation on Monday, state media reported, adding that it would assume caretaker responsibilities until Morsi forms a new cabinet.

An official with the military, which took charge after Mubarak’s overthrow in the uprising early last year, told AFP the transfer is still scheduled for June 30.

A senior Brotherhood member, Sobhi Saleh, told the official news agency that Morsi would take the oath in front of the constitutional court instead of in parliament, which the military disbanded earlier this month.

In Cairo’s Tahrir Square, Muslim Brotherhood cadres pressed on with a days-long sit-in aimed at pressuring the military to repeal decrees granting it the disbanded parliament’s powers and a broad say in security policies.

The military also has control over the budget drawn up by the outgoing cabinet, which the Muslim Brotherhood-dominated parliament had strongly disputed.

Morsi, who defeated his rival, ex-Mubarak premier Ahmed Shafiq, with 51.7 percent of the vote, quickly moved to allay domestic and international concerns over the Islamists’ victory in the Arab world’s most populous country.

The Cairo stock exchange closed up 7.5 percent on Monday at 4,482.48 points, its largest increase in more than a year, amid optimism that the official announcement of a president would help stabilize the country.

But ratings agency Standard and Poor’s said it was placing its “B” long-term foreign- and local-currency sovereign ratings on Egypt on CreditWatch with negative implications.

“The CreditWatch placement reflects our view of at least a 50 percent likelihood of a downgrade over the next three months,” the agency said in a statement.

“This could occur if escalating political tensions, and the authorities’ ongoing ineffectiveness in addressing economic, fiscal and external challenges, further weaken key economic and external indicators while also undermining donors’ and multilateral lending institutions’ willingness to extend support.”

After being announced the winner on Sunday, Morsi in a speech vowed to be president to all Egyptians and appealed for national unity.

The fiercely pro-Palestinian leader also pledged to honor Egypt’s international treaties, which include a 1979 peace treaty with Israel.

Israeli Prime Minister Benjamin Netanyahu issued a careful statement after Morsi was declared the election winner.

“Israel values the democratic process in Egypt and respects the results of the presidential election,” his office said in a statement.

But Israel’s archfoes ― Shiite Hezbollah in Lebanon and the Islamic Republic of Iran ― hailed Morsi’s victory.

Hezbollah called his election “historic,” while Iranian President Mahmoud Ahmadinejad called for stronger ties between Iran and Egypt, IRNA news agency reported.

“I congratulate you for your victory as head of Egypt, a friendly and brotherly country,” Ahmadinejad said in a statement addressed to Morsi.

However, the presidency in Cairo denied on Monday that Morsi had given an interview to Tehran’s Fars news agency, in which he reportedly pledged to strengthen ties with Iran, according to Egyptian state news agency MENA.

Italian Prime Minister Mario Monti, meanwhile, called on Morsi to pursue Egypt’s “democratic transition” in order to fully implement human rights and the rights of religious minorities.

And the king of Morocco also congratulated Morsi, wishing him “full success” in steering Egypt during this “decisive” phase of its modern history and declaring his determination to work closely with Egypt.