* Main index surges 6.2 pct after 5-month low

* Critics said tax was complicated, burdensome

* Egypt aims to fix state finances, attract investors

(Adds trader comments, updates index)

By Ehab Farouk

CAIRO, May 18 (Reuters) - Egypt froze plans for a 10 percent tax on capital gains on Monday, reversing a central component of its economic reform agenda that investors had criticised.

It kept in place a 10 percent tax on stock dividends. The Cairo bourse had previously been exempt from any taxes on capital gains or dividends.

The taxes, approved by President Abdel Fattah al-Sisi last July as part of efforts to overhaul an economy battered by years of political turmoil, were challenged in court last month. ID:nL8N0XP2RM

Former army chief Sisi, who ousted Egypt's first freely-elected president following mass protests against his rule, has promised serious reforms to win back foreign investors who fled the market after a 2011 uprising.

Egypt must balance reforms aimed at narrowing a budget deficit of around 10 percent with efforts to boost business activity.

The decision to delay the capital gains tax for two years surprised the market after the finance minister told reporters last month the government would only amend the payment method. ID:nL5N0XR43X .

The Cairo index .EGX30 , which hit a five-month low last week, surged 6.2 percent after the announcement. It was headed for its biggest daily gain in 22 months, with at least a dozen stocks reaching their daily 10 percent limits. ID:nL5N0Y923C

The prime minister and the investment minister opened the trading session earlier in an unusually public show of support for the stock exchange.

"The government reaffirms the importance of the bourse and its role in attracting foreign investments to Egypt," Investment Minister Ashraf Salman told Reuters by phone.

He said the decision, which awaits Sisi's approval later this week, was aimed at improving liquidity in the stock market.

"The decision will reflect positively on the volume of trading by foreigners in the market and on direct investment in Egypt in general," said Mohamed Maher, chief executive of brokerage Prime Holding.

The introduction of the new taxes sparked a sell-off last month by disgruntled investors, who complained the tax regulations were too complicated and would make the bourse less competitive compared with other markets.

Allen Sandeep, head of research at NAEEM Brokerage, said the capital gains freeze translated into "a reduction in the cost of capital in general. At the same time, this for now, rules out earlier concerns over the actual implementation of the capital gains tax."

(Additional reporting by Stephen Kalin in Cairo, Olzhas Auyezov in Dubai; Writing by Stephen Kalin; Editing by Michael Georgy/Ruth Pitchford) ((stephen.kalin@thomsonreuters.com; +20 22 578 3290; Reuters Messaging: stephen.kalin.thomsonreuters.com@reuters.net))

Keywords: EGYPT TAX/STOCKS