While Nasser admitted to doubts about the West's sincerity, the United States became incensed over Egypt's decision to recognize communist China. Meanwhile, the Soviet Union was offering aid to Egypt in several forms, including a loan to finance the Aswan High Dam. Then, on July 19, the United States withdrew its loan offer, and Britain and the World Bank followed suit. Nasser was returning to Cairo from a meeting with President Tito and Prime Minister Nehru when he heard the news. He was furious and decided to retaliate with an action that shocked the West and made him the hero of the Arabs.

On July 26, 1956, the fourth anniversary of King Faruk's exile, Nasser appeared in Muhammad Ali Square in Alexandria where twenty months earlier an assassin had attempted to kill him. An immense crowd gathered, and he began a three-hour speech from a few notes jotted on the back of an envelope. When Nasser said the code word, "de Lesseps," it was the signal for engineer Mahmud Yunis to begin the takeover of the Suez Canal.

The canal's owner was the Suez Canal Company, an international company with headquarters in Paris. Anthony Eden, then British prime minister, called the nationalization of the canal "theft," and United States secretary of state Dulles said Nasser would have to be made to "disgorge" it. The French and British depended heavily on the canal for transporting oil supplies, and they felt that Nasser had become a threat to their remaining interests in the Middle East and Africa. Eden wanted to launch a military action immediately but was informed that Britain was not in a position to do so. Both France and Britain froze Egyptian assets in their countries and increased their military preparedness in the eastern Mediterranean.

Egypt promised to compensate the stockholders of the Suez Canal Company and to guarantee right of access to all ships, so it was difficult for the French and British to rally international support to regain the canal by force. The Soviet Union, its East European allies, and Third World countries generally supported Egypt. The United States moved farther away from Britain and stated that while it opposed the nationalization of the canal, it was against the use of force.