* Amazon ( AMZN ), USPS have been negotiating new contract for

over a year

* Amazon ( AMZN ) says USPS walked away; USPS says it is still

negotiating

* USPS faces cash crunch; needs auction to raise funds

* USPS auction adds uncertainty, Amazon ( AMZN ) says

(Adds comment from Amazon ( AMZN ) in paragraphs 10-11, USPS in

paragraphs 14)

By David Shepardson

WASHINGTON, March 17 (Reuters) - Amazon.com ( AMZN )

plans to sharply cut the number of packages it sends through the

U.S. Postal Service after failing to agree business terms, a

person briefed on the matter told Reuters.

The e-commerce major, widely considered the Postal Service's

biggest customer, has been reducing postal shipments and aims to

cut them by at least two-thirds by September when its contract

ends, the person said.

The Wall Street Journal reported the plan earlier on

Tuesday.

U.S. Postmaster General David Steiner told Reuters on the

sidelines of a congressional hearing on Tuesday that USPS is

still negotiating with Amazon ( AMZN ).

"I couldn't tell you where that's going to end," Steiner

said, declining to comment on the size of any reduction, citing

a confidentiality agreement.

Steiner said at a U.S. House hearing on Tuesday that USPS

could be out of cash within 12 months, or as early as October if

it makes required retirement payments.

Amazon ( AMZN ) and USPS have been in talks for more than a year

about extending their relationship. However, Amazon ( AMZN ) package

volume has begun to come down with full reduction likely by

fall, the person said, declining to be identified as the

information was private.

USPS in January began taking proposals for access to its

last-mile delivery network, opening up more than 18,000

destination delivery units and local processing centers

nationwide through an auction process aimed at raising funds.

Amazon ( AMZN ) last year said, after a 30-year relationship, it was

"surprised" USPS wanted to run an auction and that given the

uncertainty it was evaluating options.

On Tuesday, Amazon ( AMZN ) said in a statement it had "wanted to

increase our volumes with the USPS. We negotiated with them in

good faith for over a year to try and reach a deal that would

bring them billions in revenue and believed we were heading

toward an agreement, when the USPS abruptly walked away at the

11th hour and introduced the auction concept."

Amazon ( AMZN ) said it submitted a bid and, though it hopes "to

continue our partnership, even at a reduced level, we now have

to prepare to meet our customers' delivery needs regardless of

the outcome of the auction."

In April, Amazon ( AMZN ) said it would spend more than $4 billion to

expand its U.S. rural delivery network by year-end, doubling

down on faster shipments to increase demand from shoppers in

small towns and the countryside.

Steiner noted in December that Amazon ( AMZN ) used USPS 1.7 billion

times a year to handle packages.

Steiner in December told Reuters that without USPS "Amazon ( AMZN )

wouldn't be what it is today... We would love to continue that

relationship. We just want to make sure we continue at a fair

price."