Affording strategic proximity to the Strait of Gibraltar, Morocco was also of interest to the French throughout the first half of the twentieth century because they assumed that if they did not hold it, their grip on Algeria was always insecure.
For answer choice E, if you state that "it" does not clearly refer to anything, then answer choice B also has the same issue. Why is B grammatically correct then?
With answer E, the sentence would read: "... Morocco was also of interest to the French throughout the first half of the twentieth century because they assumed that never would their grip on Algeria be secure if they did not hold it." Here both "Algeria" and "Morocco" come before the pronoun "it," so "it" could refer to either of the two (Algeria or Morocco).
If we choose answer B, we don't have that issue. The sentence becomes: "... Morocco was also of interest to the French throughout the first half of the twentieth century because they assumed that without it their grip on Algeria would never be secure." Here Algeria comes after "it," so "it" cannot refer to Algeria. Therefore, it's clear that "it" refers to Morocco.
1 Explanation