(Adds U.S. reaction in paragraph six)

By Tsegaye Tadesse

ADDIS ABABA, July 9 (Reuters) - Ethiopian prosecutors demanded the death penalty on Monday for 38 opposition officials and journalists convicted of trying to overthrow the government, treason and inciting violence.

"Since they have been found guilty on all counts, they should be punished with the highest penalty," prosecutor Abraham Tetemke told the court, which adjourned for a week to consider the demand.

"The accused conspired to overthrow the government. In the process they have created havoc, destroying state and private property. They are also responsible for the deaths of security forces and because of this we request the death penalty."

Judge Adil Ahmed ordered the accused to present whatever mitigating evidence they might have to the court's registrar by July 11. The proceedings will resume on July 16.

The courtroom was packed with relatives of the accused, who sobbed as they heard the prosecutors' demand.

The United States, which counts Ethiopia as an ally, said it was surprised by the demand. It urged the Ethiopian government and high court to take action "consistent with the greater objectives of bolstering the rule of law".

The last time the death penalty was carried out in Ethiopia was in the 1990s. The death sentence has been passed in several cases since then, but those condemned have not been executed.

Speculation has mounted among human rights activists that a deal is being thrashed out behind the scenes to free the 38.

"Discussions are being led by a group of elders which may lead to some kind of release," one source who has been monitoring the case closely told Reuters.

"People involved in the process remain optimistic. The sentencing...may not be the end of the story."

CLASHES AFTER 2005 ELECTION

The group was convicted last month of charges relating to protests over 2005 polls the opposition says were rigged.

Nearly 200 people were killed in clashes between protesters and security forces over the vote which was billed as Ethiopia's freest ever.

It gave the opposition its largest showing in parliament. But European Union observers listed a catalogue of irregularities including the intimidation of opponents.

Prime Minister Meles Zenawi has said he regretted the post-election violence, but blamed it on opportunistic rioters and an opposition conspiracy to topple him by force.

Last month, he condemned calls by Western diplomats for the 38 to be released as "shameful and wrong".

The crackdown tarnished Meles' democratic credentials and prompted donors, including Britain and the EU, to halt direct budgetary aid to sub-Saharan Africa's second most populous nation of 81 million people.

The prosecution also called for the banning of three independent publishing houses linked to the accused and for their owners to be fined about $55,000 each. (Additional reporting by Katie Nguyen in Nairobi)