By Lesley Wroughton

WASHINGTON (Reuters) - The United States hopes a damaging row between the leaders of U.S. allies South Korea and Japan has hit rock bottom but believes recent military exercises by Seoul have not helped, a senior State Department official said on Tuesday.

Briefing reporters in Washington, the official said that both Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in had made "unhelpful" choices in the dispute, which has taken relations between Seoul and Tokyo to their lowest ebb in decades, and hurt U.S. security interests.

"I keep thinking we have reached rock bottom and then keep getting surprised," the official said. "I'm hopeful both sides have made their point."

"We are still actively engaged in trying to get them now to start rebuilding this relationship."

The official spoke on condition of anonymity given the diplomatic sensitivities in the dispute between the two main U.S. allies in Asia.

The Seoul-Tokyo relationship began to deteriorate late last year following a diplomatic row over compensation for wartime forced laborers during Japan's occupation of Korea.

They plumbed fresh depths last week when South Korea announced it was scrapping an intelligence-sharing pact with Japan in spite of rising tensions with North Korea and an increasing challenge presented by China in the region.

The U.S. official said the dispute had "pretty much damaged the possibility of continuing in this information-sharing agreement," but added: "It is not completely lost... There are opportunities to hopefully recover."

He said there was blame to be apportioned to both sides, although he stressed South Korea's decisions on the pact and on a move to hold two days of expanded drills from Sunday around an island also claimed by Japan.

"This is a dispute between leaders on both sides," he said. "There have been unhelpful choices made on both sides, which is why we're not just talking about one or the other.

"The problem is, and the reason why we're talking about it today, is because the most recent action on the part of Seoul directly affects U.S. security interests. This is something we can't sit quiet for."

"We didn't find that exercise particularly helpful," the official said of the South Korean drills on Sunday. "These are actions that don't contribute to resolving this problem. It simply exacerbates it. We would appreciate it if both sides would allow things to settle down and then earnestly get back" to negotiations.

A second senior U.S. State Department official said Washington was encouraged by continued talks at working level between the sides. "There are folks in both countries (who) are eager to improve relations," he said.

(Reporting by Lesley Wroughton and David Brunnstrom, Editing by Rosalba O'Brien)