http://www.faa.gov/air_traffic/publi...1.html#Section 1. General
Seems there are some quite worrying misinterpretations of the regs...
"A pilot who encounters a DISTRESS condition may declare an emergency by beginning the initial communication with the word MAYDAY, preferably repeated three times. For an URGENCY condition, the word PAN-PAN may be used in the same manner."
The whole "declaring an emergency" instead of calling "mayday" thing that people are on about is nonsense. The regs clearly state that the emergency should declared by the use of a mayday or pan call.
Yes, the controller should have handled it as an emergency as a precaution, but the pilot made an error by not declaring using the standard phraseology.