WASHINGTON (Reuters) - The U.S. military said on Tuesday it has formally notified Egypt and Israel that it is reviewing whether to automate aspects of multinational peacekeeping operations in the insurgency-wracked Sinai, potentially allowing a reduction in American troop deployments.

U.S. officials, speaking to Reuters on condition of anonymity, said using remote surveillance technology could eventually allow the United States to withdraw hundreds of its roughly 700 peacekeeping troops.

Installed to monitor the demilitarization of the Sinai under the 1979 Egyptian-Israeli peace accord, the Multinational Force and Observers (MFO) mission has come under increased scrutiny over the past year, particularly after six peacekeepers were wounded by a roadside bomb in September. Four U.S. soldiers were among them.

The United States believes that the structure of the more than three-decade old operation may be outdated.

"I don't think anyone's talking about a [complete] withdrawal," said Navy Captain Jeff Davis, a Pentagon spokesman, declining to discuss specifics about any potential troop reduction.

"I think we're just going to look at the number of people we have there and see if there are functions that can be automated or done through remote monitoring."

Changing the MFO mission could be a sensitive proposition to both Israel and Egypt.

Cairo sees the MFO as part of a relationship with Israel that, while unpopular with many Egyptians, brings it $1.3 billion in annual U.S. defense aid, sweetening the foreign-enforced demilitarization of their sovereign Sinai territory.

For the Israelis, the MFO offers strategic reassurance, especially following Egyptian President Abdel Fattah al-Sisi's toppling two years ago of an elected Islamist regime hostile to the Jewish-majority state next door.

The White House stressed that the United States was not questioning its support for the mission.

"The U.S. commitment to this treaty and this mission has never been stronger, and that's evidenced by the fact that the United States government is prepared to deploy new equipment and new technology," White House Spokesman Josh Earnest said.

Among the options being considered are use of remote sensors or surveillance to do some of the work in the peninsula that lies between Israel, the Gaza Strip and the Suez Canal.

"What we are looking at is, this has been in existence for 30 years and the mission has remained largely unchanged," Davis said.

"What we want to be able to do is look at the core things that that mission provides and see how we can leverage modern technologies, remote surveillance capabilities, etc., to be able to carry out that mission."

Egyptian security efforts in the Sinai have suffered major setbacks, including the Oct. 31 downing of a Russian airliner and Friday's bombing of two armored personnel carriers that killed seven.

Islamic State insurgents claimed responsibility for both incidents.

An Egyptian diplomat, speaking to Reuters on condition of anonymity, said over the past month the MFO had already shut down two outposts near Egyptian Rafah.

The area has not been especially hard hit by the Sinai insurgency, the diplomat said, but added that the MFO "considered them too difficult to maintain in terms of logistics." 

(Reporting by Phil Stewart; additional reporting by Dan Williams in Jerusalem and Diona Chiacu, David Alexander and Idrees Ali in Washington)