By Arshad Mohammed and Lesley Wroughton
WASHINGTON (Reuters) - The United States is considering calling off a major military exercise with the Egypt after Egyptian security forces killed scores of protesters on Wednesday, U.S. officials said.
The bloodshed appears to have forced U.S. President Barack Obama's administration to consider adopting a more muscular stance toward the Egyptian military, which toppled Mohamed Mursi, Egypt's first freely elected president, on July 3.
The United States, which gives Egypt $1.3 billion in military aid and about $250 million in economic aid each year, has been reluctant to cut the funding for fear of antagonizing the military and losing what influence it has in the Arab world's most populous nation.
As a first step, two U.S. officials said, the administration might respond to the violence in which more than 200 people were killed by scrapping the "Bright Star" exercises, which occur every two years and are a major point of pride for the Egyptian military.
"They're taking a hard look at it," said a U.S. official who was not authorized to speak publicly about the matter.
Calling off the joint drill, which is seen as a cornerstone of U.S.-Egyptian military relations and began in 1981 after the Camp David Peace Accords between Egypt and Israel, would be the strongest signal that the U.S. government has sent Cairo since its July 24 decision to halt delivery of four F-16 fighter jets.
Asked why the exercise had not already been called off, the official said, "Everyone was hoping that things would improve."
In another setback for U.S. policy, Egypt's army-backed rulers declared a one-month state of emergency, restoring to the military the unfettered power it wielded for decades before a pro-democracy uprising toppled autocrat Hosni Mubarak in 2011.
A third U.S. official said the administration was giving greater thought to trimming U.S. aid following the violence, in which at least 235 people were killed, including at least 43 police, and 2,000 wounded, according to an Egyptian health official.
Mursi's Muslim Brotherhood said the death toll was far higher in what it described as a "massacre.
"The events of the last 24 hours have certainly been a factor in considering aid moving forward," said the official, who spoke on condition of anonymity. "The question is where do we go from here."
TIME TO RE-EVALUATE RELATIONSHIP?
U.S. Secretary of State John Kerry on Wednesday called the bloodshed in Egypt "deplorable" - a word U.S. diplomats seldom use - and urged all sides to seek a political solution.
"Today's events are deplorable and they run counter to Egyptian aspirations for peace, inclusion and genuine democracy," Kerry told reporters during a brief appearance at the State Department.
"Egyptians inside and outside the government need to take a step back, they need to calm the situation and avoid further loss of life," he added. "We believe that the state of emergency should end as soon as possible."
A State Department spokeswoman later said Kerry meant to say that the state of emergency should be lifted "immediately."
It was unclear whether the latest violence - the worst that Egypt has suffered in a single day since its 1973 war with Israel - would trigger a fundamental change in U.S. policy.
The United States has insisted it is not taking sides since the military ousted Mursi last month, but it chose not to condemn his ouster nor to call for his reinstatement.
Current and former officials have said the administration has no appetite for terminating aid for fear of antagonizing the military, one of Egypt's most important institutions.
Nor does it wish to increase instability in Egypt, which is of strategic importance because of its peace treaty with close U.S. ally Israel and its control of the Suez Canal, a vital waterway for the U.S. military.
Jon Alterman, director of the Middle East program at the Center for Strategic and International Studies think tank, said it was unrealistic to expect Egypt's rulers to heed U.S. advice while engaged in what they see as an "existential" struggle.
"What's important for the U.S. government to make clear is not that we will reward them if they act well and punish them if they act poorly but that their actions suggest ... a need on our part to re-evaluate the totality of our relationship," he said.
"We have had an intimate, broad and deep relationship with the Egyptians that we have sought to deepen and broaden for the last 30 years and we seem to be at a juncture where we are going to have to look at ways to make that relationship narrower."
(Additional reporting by Andrea Shalal-Esa; Writing by Arshad Mohammed; Editing by Sandra Maler and Mohammad Zargham)