* Drills seen as centerpiece of US-Egypt military ties
* Cancellation blamed on "political situation"
* Egyptian official says no units free, "everybody's busy" (Adds Egyptian and U.S. analysts)
By Marwa Awad and Phil Stewart
CAIRO/WASHINGTON, Aug 17 (Reuters) - Egypt and the United States are scrapping this year's planned military drills, known as Bright Star, the largest exercises of their kind in the region, sources in both countries told Reuters on Wednesday.
An Egyptian army official, speaking on condition of anonymity, said political upheaval this year that saw former President Hosni Mubarak overthrown got in the way of planning the drills held in Egypt every two years.
A second Egyptian official said the military was stretched too thin to participate, citing the law-and-order role taken on by the army following the 18-day popular uprising that ousted Mubarak on Feb. 11 after three decades in power.
"There are not any free units to do this now. Everybody's busy," said the second official, who spoke on condition of anonymity.
Egypt has been in political limbo since an armed forces military council took power after Mubarak's departure, with the army handling day-to-day government as well as the country's internal security and patrolling the borders.
A Pentagon spokesman confirmed Reuters' reports that the drills were canceled, and acknowledged that "transition events" in Egypt and the Egyptian military's role as interim leaders of the country played a role in the decision.
OLDEST U.S. EXERCISE IN REGION
The cancellation of the exercise comes at a delicate moment in Egypt, whose military rulers -- seen as close to the United States -- are under pressure to speed democratic reforms six months after taking command in the wake of Mubarak's downfall.
The U.S. military describes Bright Star, which dates to 1981 and was an outgrowth of the Camp David Peace Accords between Egypt and Israel, as the centerpiece of U.S.-Egypt military relations.
The drills are the oldest military exercises in the U.S. military's Central Command region, which includes Iraq and Afghanistan. In 2009, the exercise included forces from Jordan, Kuwait, Pakistan, Saudi Arabia and Turkey.
The second Egyptian official rejected the idea the decision might reflect a desire by Egypt's military to distance itself from Washington.
"We are more close than at any time before," he said, adding he expected the next exercise to take place on schedule in 2013.
A U.S. military official, speaking on condition of anonymity, also said both countries aimed to resume the drills in 2013, with the Egyptian government agreeing to start formal planning meetings in June 2012.
U.S. President Barack Obama and his aides repeatedly cited long-standing U.S.-Egyptian military ties as a valuable tool in managing the crisis that toppled Mubarak. Top U.S. defense officials talked to their Egyptian counterparts frequently, urging them not to act against pro-democracy protesters.
Egypt's military has said repeatedly it is moving as swiftly as possible to civilian rule with a parliamentary poll due in November and a presidential election next year.
EGYPT NOT DISTANCING ITSELF FROM U.S.
U.S. and Egyptian analysts said it made sense that the Egyptian military may be too tied up to conduct the exercise because of its current law-and-order responsibilities.
They also played down the idea that Egypt's military might be trying to distance itself from the United States.
"I am not aware ... of tension between the Egyptian military and the American military," said Michele Dunne, a Middle East analyst with the Atlantic Council think tank.
"Egypt needs Bright Star and relies more on the U.S. (in the) military sphere and not vice versa," said Egyptian military analyst Safwat Zayaat. "Egypt has internal problems to deal with including Sinai unrest and general political situation in the country."
The military launched an operation this week to try to crack down on armed groups in the lawless northern Sinai. Since Mubarak's ouster, there has been a spike in attacks in the Sinai, including five on a pipeline that carries gas to Israel. (Additional reporting by Arshad Mohammed in Washington; Editing by Jackie Frank and Peter Cooney)
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