"The position of secretary of state should never be politicized," Rice said. "As someone who grew up in an era of comparative bipartisanship and as a sitting U.S national security official who has served in two U.S. administrations, I am saddened that we have reached this point."
Support has been trending away from Rice for the past few days, according to a person familiar with the deliberations. That person spoke only on condition of anonymity, not authorized to discuss the situation publicly.
Attention now shifts to Kerry, who came close to winning the presidency in 2004 and has been seen as desiring the State job. In a statement, he made no mention of his own candidacy but praised Rice, who was an adviser to him his in his presidential bid.
Kerry was an early backer of Obama and was under consideration to become his first secretary of state. Obama has dispatched Kerry to foreign hot spots on his behalf. Kerry played the role of Republican Mitt Romney during Obama's presidential debate preparations this year.
The longtime senator would be almost certain to be easily confirmed by his colleagues on Capitol Hill.
Even if Rice had been chosen and confirmed, a contentious Senate fight could have sent her into the job with weakened support and used up some of the tough votes Obama may need from allies in the Senate later.
House Democratic women had cast the criticism of Rice as sexist and racist — she is African-American — and some expressed disappointment with the news.
"If judged fairly based solely on her qualifications for the job, she would've made an extraordinary secretary of state," said Rep. Karen Bass, D-Calif., a member of the House Foreign Affairs Committee.
Rice did not have a strong relationship with members of the Senate. Graham, who is the top Republican on the Appropriations subcommittee that handles foreign aid and the State Department, said he barely knew her.
In a brief statement, a spokesman for McCain said the senator "thanks Ambassador Rice for her service to the country and wishes her well. He will continue to seek all the facts surrounding the attack on our consulate in Benghazi."
Rice's decision comes ahead of the anticipated release next week of a report by an Accountability Review Board into the attack on the Benghazi mission. The report ordered by Clinton, focuses on the run-up to and the actual attack and is not expected to mention Rice's role in its aftermath.
Clinton is to testify about the report before Congress next Thursday.
At issue is the explanation Rice offered in a series of talk show appearances five days after the attack in Libya.
Rice has conceded in private meetings with lawmakers that her initial account — that a spontaneous demonstration over an anti-Muslim video produced in the U.S. triggered the attack — was wrong, but she has insisted she was not trying to mislead the American people. Information for her account was provided by intelligence officials.
Obama had been expected to announce his new national security team next week, but that could be pushed back because of fiscal cliff negotiations. The president may announce his nominees to lead the State and Defense Departments, and perhaps the Central Intelligence Agency, at the same time.
Hagel, a former Republican senator from Nebraska, is a Vietnam veteran, served two terms in the Senate and was a senior member of the Foreign Relations Committee. Obama and Hagel became close while they served in the Senate and traveled overseas together. Hagel has been critical of his party since leaving the Senate in 2008, saying the GOP had moved too far right.
Associated Press writers Donna Cassata, Ken Thomas, Matthew Lee and Matthew Daly contributed to this story.
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