Egyptian President Mohamed Morsi this week swore in Khayat as the new governor of Luxor governorate, an international tourism magnet.
Although Gamaa Islamiya denounced al-Qaeda a decade ago, they are still listed as a terrorist group by the U.S. State Department.
Morsi's decision to appoint a a governor who led a group best known for frightening foreigners away from Egyptian tourism sites has many baffled, as Egypt tries to bring back the tourism it lost following the January 2011 revolution.
Declines in tourism over the last two years have cost Egypt an estimated $2.5 billion. There have been reports of vendors desperate for sales being aggressive, sometimes criminal, toward foreigners.
Earlier this month Egypt's minister of antiquities, Ahmed Eissa, insisted the Giza pyramid complex was safe after the U.S. and other embassies issued travel warnings about the area.
Gamaa Islamiya has some support in rural areas in the Nile river valley, but despite the growing influence of Islamism, demonstrators in Luxor protested Khayat’s appointment with signs reading "No to the terrorist governor."