Egyptian President Abdel-Fattah el-Sissi, in a televised address Wednesday, said Egypt did not surrender its territory but "restored" the rights of the Saudis.
Egypt's government maintains that the islands of Tiran and Sanafir at the mouth of the Gulf of Aqaba belong to Saudi Arabia, which asked Egypt in 1950 to protect them from Israel, the Associated Press reported.
Israel captured the islands in the 1967 Middle East war, but handed them back to Egypt under the provisions of the 1979 peace treaty.
Cairo's decision to transfer custody of the islands to Saudi Arabia, which must be ratified by parliament, has kicked off a storm of protest in Egypt.