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By Akash Sriram

April 11 (Reuters) - U.S. federal budget cuts have started to have some early impact on space startups after funding for such companies dropped 12.5% in the first quarter, according to investment firm Seraphim Space.

Elon Musk-led Department of Government Efficiency and the Trump administration have been delaying or cancelling contracts across its agencies to curb federal spending.

"Within certain government departments, uncertainty is causing delays as they assess which contracts to move forward with," Seraphim Space investment analyst Lucas Bishop said.

Space startups — which garnered $2.1 billion in investments in the first quarter — have largely relied on government contracts over the past few years as rising geopolitical tensions led to a surge in demand for imaging and analytics.

Following strong stock performance of space companies such as Rocket Lab RKLB.O and Redwire RDW.N late last year, Voyager Space filed to go public in January, while Karman Holdings KRMN.N listed in February.

But the early momentum is fading with uncertainty sparked by President Donald Trump's tariffs and ensuing market volatility, Seraphim Space said.

Investments in the January-March period were concentrated in companies that make and operate space hardware such as rockets and satellites. The first quarter saw the two largest fundraising rounds from Stoke Space and Loft Orbital, together bringing in $430 million.

"More protectionist trade policies could slow development in the short term, as many advanced space technologies — from propulsion systems to high-performance materials — depend on global supply chains," said former NASA division chief Robert Ambrose.

However, in times of economic uncertainty, commercial spaceflight and space technology companies have become more critical partners, enabling cost-effective missions, said Ambrose, who is also chairman at Alliant robotics.

Investments in space startups rose 12% to $8.1 billion in the 12 months to March, with the number of deals in Europe rising nearly 50% in the first quarter on bigger European Union budgets and a renewed focus on self-reliance.

($1 = 0.8827 euros)

(Reporting by Akash Sriram in Bengaluru; Editing by Shilpi Majumdar and Alan Barona)

((Akash.Sriram@thomsonreuters.com; On X as @HoodieOnVeshti; +91-99017-77617;))