The liberal historiography of interwar Egypt has been marked with nostalgia for the supposed cosmopolitanism of (middle- and upper-class) Egyptian society, thanks to the presence of European foreign communities that enjoyed special legal treatment under the Ottoman Capitulations, as enforced by British military occupation. This literature holds Gamal ?Abd al-Nasir’s nationalization and sequestration of foreign property responsible for the end of this era and the associated social, cultural and economic ills of nationalism. This paper argues instead that the war forced the British to make progressive concessions to Egyptian administrators with regards to the regulation and policing of foreign residents to obtain its objectives in its war against the invading Axis powers far earlier than the Nasser era. In the aftermath of the Italian invasion of Ethiopia in 1935, the British signed a bilateral defense treaty with Egypt to legitimize its military occupation, which gave Egypt autonomy over domestic administration, secured its entry to the League of Nations, and paved the way for the 1937 Montreux conference, which scheduled an end to the Capitulations in 1949. Using diplomatic exchanges between the British and Egyptians, and police and judicial records from the Egyptian National Archives, the paper demonstrates that the war itself accelerated this trend towards Egyptian legal autonomy and sovereignty prior to 1949. The Egyptian government declared a state of emergency as required in its treaty with Britain, which gave it legal jurisdiction for the first time over all European nationalities in matters touching state security, a vague and expandable mandate. In 1940, the British requested that the Egyptians imprison the 15,000 military-age civilians of the Italian community, but the Egyptians negotiated to do this on their own terms. The Egyptian government sequestered Italian property set up a system of collective licensing and support of internees’ families and other foreigners that was analogous to their wartime welfare and economic programs for Egyptian subjects. As a result of this program and other war security measures, the Egyptian state emerged after the war with far more control over the legal status and economic activities not only of the Italian community, but also of its allies, the British, French and Greeks. Using published media, I demonstrate how this control played important material and symbolic roles in the nationalist movement against the prolonged British postwar occupation of the Suez Canal.