CAIRO, NOV. 16 -- Egyptian police say they have cracked an underground revolutionary cell that fired shots at American diplomats, assassinated two Israelis and posed a challenge to the credibility of President Hosni Mubarak's government.

The group has issued communiques calling itself Egypt's Nasserite Revolution. The case is evolving into the most sensitive in years because it has touched the family of the late president Gamal Abdel Nasser, still considered Egypt's greatest national hero as the man who ousted the corrupt king Farouk in 1952.

An Egyptian official with knowledge of the case has confirmed that police want to question Khaled Abdel Nasser, a son of the president who died in office in 1970. Diplomatic sources say they believe Nasser was indeed involved. "After every operation, they used to go to Nasser and put the results in front of him," said the official. "He knew what they were doing."

In September, the police arrested 16 alleged members of the group, including three military officers with the rank of colonel. Others are still being sought. The official said all were followers of the late Nasser. He charged that they were financed by Libya.

Khaled Abdel Nasser left Egypt before police could question him and is living in London, according to a family member.

The prosecutor in the case has banned discussion of it in Egypt's press, but the political intrigue surrounding the case has dominated Cairo political gossip for weeks.

Egyptian police got their lead in the case when a member of the group sought out American officials to inform on his colleagues. "That was the beginning of our investigation," said the official, acknowledging what has been rumored for weeks.

According to reliable sources, Essam Sayed, brother of the group's leader, Nur Sayed, sought a clandestine meeting with American diplomats after his brother, in a fit of anger, shot and wounded him.

The same sources said the Americans administered a lie-detector test and taped his statement before handing him over to Egyptian authorities. The case puts Mubarak in an uncomfortable position. The Americans would like to see the case prosecuted, but it could be politically difficult for an Egyptian government to prosecute followers of Gamal Abdel Nasser.

The group's communiques have claimed their targets were agents of the CIA and of Israeli intelligence. The government is said to have encouraged Khaled Abdel Nasser, an engineering instructor at Cairo University, to leave the country.

A western diplomat said his embassy was "getting the hint" that Mubarak would like to deal with the case "privately" to avoid embarrassment and political unrest. The source speculated that some of the defendants would be tried by a closed military court.

The prosecutor is expected to lift the publication ban when the investigation is completed. No date has been announced.

A lawyer who is close to the Nasser family insisted that allegations of Khaled Abdel Nasser's involvement with Egypt's Nasserite Revolution were unfounded. "What is mentioned about Khaled Abdel Nasser is not true," said Esmat Seif Dawlah, at the same time denying that he was the man's lawyer. He said the case would never go to court because non-Egyptians had taken the first deposition.

The revolutionary cell's first known operations were in 1984. They appeared so well planned that observers immediately speculated that some of the members were in the military.

In 1985, they shot dead an Israeli administrative attache; in 1986, a clerk working at the Israeli Embassy. After each attack, the group issued communiques claiming the members were "men of the armed forces" trying to undo the government's policy of peace with Israel.

The fact that the gunmen escaped each time without a trace gave the impression that Egypt's traditionally sharp security forces were now weakened. Officials insisted that the group was difficult to uncover because it was small and foreign-based and the participants had no previous record.

In May, the group attacked three U.S. diplomats, including the regional security chief, Dennis Williams. Gunmen in a car ambushed the Americans and opened fire at a major intersection on the way to downtown Cairo. The Americans took what were called "defensive driving measures" -- a screeching U-turn that put distance between them and their assailants. The only injuries were from shattered glass.

The gunmen were not captured. Months later, Essam Sayed sought out the Americans. How long he spent with them is unclear. The Egyptian official said it was "hours." Other sources speak of days. U.S. diplomats in Cairo have refused to comment.

Western diplomats say the case is particularly serious because of the involvement of the three colonels.

"They weren't ordinary soldiers out in a tent," said one diplomat. "The military is supposed to be behind the government. These people knew and understood the implications of what they were doing."

The diplomat speculated that Khaled Abdel Nasser and associates of his could have been the link to Libya. But left-wing intellectuals speculated that Khaled was unknowingly used by the group to lend legitimacy to its Nasserite claims. They say that Nur Sayed was not a Nasserite.

A source who knew Sayed in London said he was a typist at the Egyptian Embassy, was believed to be a local agent for Egyptian intelligence and had met Khaled Abdel Nasser there.