SACRAMENTO - CALIFORNIA'S chief financial officer warned that the state would run out of money in about two months as hopes of a Christmas budget compromise melted into political finger-pointing by the end of the day.

Republican Governor Arnold Schwarzenegger began Monday on a cheerful note, suggesting that negotiations with Democratic leaders could lead to a budget deal as early as this week to help close the US$42 billion (S$60.7 billion) shortfall that is projected through June 2010.

'Yesterday we sat there for hours and we worked through it step by step and we made some great progress,' the governor said during a morning news conference in Los Angeles.

'So we feel like if we do that two more times like that, I think we can get there ... before Christmas Eve or Christmas Day.' The thaw didn't last long, as legislative leaders later in the day criticised Mr Schwarzenegger and indicated their work was done until the start of the new year.

The governor faulted lawmakers for 'failing to take real action' in addressing the state's budget deficit but said he will continue working with them on a solution that includes spending cuts, new revenue and an economic stimulus plan.

Assembly Speaker Karen Bass responded by suggesting the governor should sign an US$18 billion package Democrats sent to him last week containing both cuts and tax increases.

Republicans, meanwhile, said they would not negotiate on a deal they believe to be illegal. The Democratic plan was pushed through on a simple majority vote, not the usual two-thirds vote for tax increases, which would require some Republican support.

By the afternoon, Mr Schwarzenegger spokesman Matt David said neither side had been willing to transcend party politics and special interests to make concessions.

'The Democrats want to block cuts to state government spending, and the Republicans want to block revenue increases because they have signed pledges to protect special interests,' Mr David said in a statement.

'Legislators were sent to Sacramento to fix problems, but now what they're doing is making the situation worse.' If lawmakers fail to pass an updated budget plan, state Controller John Chiang said, his office will be forced to defer billions of dollars in payments or issue IOUs to state contractors.

The instability of the banking industry has made borrowing money to bridge the gap an uncertain possibility, he said.

'The state's dire cash position not only jeopardizes and places at risk our ability to meet our financial obligations in a timely manner, it threatens our ability to respond to natural disasters and protect our communities from crime,' Mr Chiang wrote.

Also on Monday, state employee unions filed labour complaints to stop Mr Schwarzenegger's plans to furlough workers as a way to deal with the state's ballooning budget deficit.

Last week, he ordered all state employees to take two days off a month without pay or a similar salary cut to save US$1.3 billion in the coming fiscal year. He also ordered state agencies to cut their payrolls by 10 per cent. -- AP