Negotiations with the British for a treaty to resolve matters that had been left outstanding since 1922 had resumed. The British delegation was led by its high commissioner, Miles Lampson, and the Egyptian delegation by Wafdist leader and prime minister, Mustafa Nahhas. On August 26, a draft treaty that came to be known as the Anglo-Egyptian Treaty of 1936 was signed.

The treaty provided for an Anglo-Egyptian military and defense alliance that allowed Britain to maintain a garrison of 10,000 men in the Suez Canal Zone. In addition, Britain was left in virtual control of Sudan. This contradicted the Anglo-Egyptian Condominium Agreement of 1899 that provided that Sudan be governed by Egypt and Britain jointly. In spite of the agreement, however, real power was in British hands. Egyptian army units had been withdrawn from Sudan in the aftermath of the Stack assassination, and the governor general was British. Nevertheless, Egyptian nationalists, and the Wafd particularly, continued to demand full Egyptian control of Sudan.

The treaty did provide for the end of the capitulations and the phasing out of the mixed courts. The British high commissioner was redesignated ambassador to Egypt, and when the British inspector general of the Egyptian army retired, an Egyptian officer was appointed to replace him.

In spite of these advances, the treaty did not give Egypt full independence, and its signing produced a wave of antiWafdist and anti-British demonstrations. To many of its followers, in negotiating and signing the treaty the Wafd had betrayed the nationalist cause. Because of this perception and also because it had failed to develop and implement a program for social and economic reform, the Wafd declined in power and influence. Although it considered itself the representative of the nation, the Wafd failed to offer meaningful domestic programs to deal with the problems of under- and unemployment, high living costs, lack of industrial development, and unequal distribution of land. Thus, during the 1930s, support for the Wafd, particularly among students and urban middle-class professionals and civil servants, was eroded by more militant, paramilitary organizations like the Muslim Brotherhood (Al Ikhwan al Muslimun, also known as the Brotherhood) and Young Egypt (Misr al Fatat).