BekkaPoo, I'm with you on the PC thing.
I don't think saying African-American and Caucasian is PC. PC as opposed to what?

Thelio, I don't know how old you are, but you sound like a lot of people I know who are really young, and who have convinced themselves that ethnic slurs are just words that have no power / have come up with rappers and others in pop culture constantly using them so they think it's normal. I hear white teens calling each other the n-word all the time and laughing. Then they go say it to someone of African descent and wonder why the person goes ballistic.

I think that yes, ideally and intellectually, there is a big difference in using a slur the way your friend did with the intent to belittle, degrade and hurt, and in using it more casually. And in a perfect world, we'd know that and it would be obvious when to let it slide and when not to. However, this is far from a perfect world, and because context is always open to interpretation, any time you use a slur, there is the possibility of someone being hurt or offended. Even if you're using the word to a very close friend, if you do it in a public forum like on a facebook wall or on public transit, someone else just hearing that can cringe and feel uncomfortable and feel violated.

I don't think that your casual use of slurs means you can't still call out your friend who used one, but as you can see, it complicates the issue from what should be a simple matter of saying you are offended to feeling that you first have to justify yourself or that he can use your use of language as an out.

I think what is more important though is that, whatever happens with him, his behaviour was a springboard to a learning experience for you. As wild hair said, you have now grown wiser - so in a way, he did you a favour because in the future, you will be more careful about how you use slurs.

The other thing to think about is the origin of the actual slurs being used. For example, "cracker" actually insults Black people just as much because it comes from the term "whip-cracker", for slavedrivers, so it is continuing to speak of people as if they are in that position over us. "Mutt" is a derogatory term about "race-mixing" implying that "purebreds" are on a higher footing. Are these really the ideas you're intending to get across? I find that some people are really weird about having friends of another group. I have tons of white friends and have never felt the need to draw attention to it by calling them "crackers." It's obvious to all of us we are from different ethnic backgrounds - so what?
Get used to me. Black, confident, cocky; my name, not yours; my religion, not yours; my goals, my own; get used to me. -Muhammad Ali