(Adds more on elections, aid)

RABAT, Aug 31 (Reuters) - The United States has granted Morocco $698 million in economic aid, days before the North African country holds parliamentary elections which a moderate Islamist party hopes to win.

The grant, the biggest handed to a single country by the Washington's Millennium Challenge Corporation (MCC), will help Morocco develop agriculture, fisheries, crafts and financial services, the two governments said on Friday.

The biggest part will help the arid country's farmers shift away from less profitable, water-intensive crops and plant olive, fig and almond trees which use less water and give better returns.

The grant will also help modernize Morocco's small-scale fish industry and improve access to local and export markets.

Other projects include supporting the crafts industry in Fez so local manufacturers make the most of growing tourism to the former imperial city, and increasing financial services for Moroccan micro-enterprises.

The investments should benefit 600,000 families directly and boost Morocco's gross domestic product by around $118 million, MCC said.

Morocco's coalition government dominated by secular nationalists, socialists and royal appointees will face off against the opposition Islamist Justice and Development Party (PJD) in the Sept. 7 parliamentary polls.

The PJD is riding a wave of disatisfaction with an administration that has pushed cautious political and economic reforms but failed to eradicate widespread poverty and corruption or overturn a popular perception that governing officials are aloof and out of touch.

The Millennium Challenge programme has added $5 billion to U.S. development aid and is designed to help poor countries achieve sustainable economic growth by investing in areas including transport, water, education, industry and farming.

The grants are dependent on a country's record in just govenrment, investing in citizens and encouraging economic freedom and are a key plank of Washington's efforts to strengthen democracy in the developing world.

Morocco is a staunch U.S. ally in the Arab world and the two countries have a free trade agreement in effect since early 2006.

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