Updated at 2:45 p.m. with excerpts of Gregoire's message to state workers.

The continued economic slump brought more bad news for state government this morning, as Gov. Chris Gregoire ordered agencies to prepare for another round of budget cuts next year of up to 10 percent, or $1.7 billion.

That would be on top of the $4 billion in recession-driven cuts that lawmakers agreed to when they approved the two-year budget in May.

The memo from Gregoire's budget director, Marty Brown, cited the weakened economic outlook since the session ended.

"Given economic conditions, as well as the uncertain impact on states of pending federal budget reductions, there is a distinct possibility we will face further revenue losses in the coming year," Brown wrote.

The new round of cuts raises the possibility of a special session of the Legislature this year. In an interview, Brown said Gregoire will decide whether to call for a special session after the next revenue forecast in mid-September.

"We just need to have to have them (state agencies) get ready. With all of the uncertainty in the economy and Washington D.C., it's just prudent," Brown said.

The memo orders state agency directors to prepare a list of 5 percent first-option cuts and a secondary list of what could be cut if an additional 5 percent cut is needed. Agencies are told to assume a Jan. 1 start date for cuts that cannot begin immediately.

The cuts would range from $838 million for a 5 percent reduction, to nearly $1.7 billion if they go to 10 percent.

Gregoire sent an email to state employees letting them know the news.

"For every two steps forward in the recovery, it seems we are taking one step back," Gregoire said in the message, saying the uncertainty over the federal debt, credit downgrades, European markets and the lingering effects of the Japan tsunami "are causing us to be extra cautious."

Gregoire said agencies need to consider "service outcomes, not just dollar amounts" as they prepare their lists of potential cuts. "Trust me, I continually wish I had better news to share," she added.