"The United States wants to see Egypt succeed, and we believe the U.S.-Egypt partnership will be strongest when Egypt is represented by an inclusive, democratically elected civilian government based on the rule of law, fundamental freedoms and an open and competitive economy," Psaki said.
"As a result of the review directed by President Obama, we have decided to maintain our relationship with the Egyptian government, while recalibrating our assistance to Egypt to best advance our interests."
Psaki said the United States will continue to provide humanitarian aid but will hold off delivery of "certain large-scale military systems and cash assistance to the government" until the government moves toward "free and fair" elections.
Psaki said the relationship between Egypt and the United States is important and the two countries need to work together against terrorism.
Egyptian leaders said they have not been informed of any decision by the Obama administration to cut military aid.
Supporters of the coup that overthrew Morsi dismissed an aid cut, The Washington Post reported. Mahmoud Afifi, a member of the June 30th Front, told the semiofficial Youm7 newspaper the country does not need the money.
"What we do need is more true national independence," he added.
Israeli leaders opposed any aid cuts, saying they might have effects far beyond Egypt. An official who did not want his name used told The New York Times other Arab countries would perceive the United States "dropping a friend."
"You cannot disassemble the peace treaty and take out this part or that part," the official said. "But there are other elements in this conundrum. This is not just about Israel. This is about America's standing in the Arab world."
Prime Minister Binyamin Netanyahu would not comment on the specific cut. In a radio interview last week he said Israel's interest is in having the peace treaty hold and said it was "premised" on U.S. military aid.