Arnold Schwarzenegger's State of California is expected to run out of money within two months, the governor's chief financial officer says.

California has been forced to spend billions of dollars more each month without collecting enough taxes due to its budget crisis and will thus have an empty kitty in late February, state controller John Chiang said on Monday.

The governor's administration is spending $11bn a year more than its total income. The figure is expected to balloon to $42bn by 2010.

Reports indicate that Schwarzenegger has already started settling bills and paying employees by issuing "IOU" notes promising to pay them later.

"We are witnessing rapid deterioration in the state's economy and the national economy," Chiang told a local radio.

"We are running out of time and we don't have the solutions we had a couple of months ago," he warned.

This is the first time in American history that a whole state is driven into bankruptcy as a product of a nationwide recession.

Schwarzenegger told a press conference on Monday that his state faced a financial disaster but added that talks with state lawmakers to break the budget gridlock were ongoing.

Last week, the governor turned down an 8 billion dollar deficit-reduction plan passed by California lawmakers.

He also issued an executive order requiring state employees to take two unpaid days off each month, describing the measure as necessary to prevent California from going bankrupt.

MT/AA