By Michael Connor

MIAMI (Reuters) - State governments eager for
paydays in hard times are doubling down on gambling even though
America's casino industry is still sliding from a peak reached
three years ago.

Desperate for revenue to ease budget shortfalls totaling an
expected $127 billion or more this fiscal year alone, lawmakers
and governors are championing casino deals and looking past
flashing signs of distress.

Atlantic City, which once had the only casinos on America's
densely populated East Coast, is losing so much business to
rivals that New Jersey's governor is pressing a plan for the
state government to take over the faded seaside resort's
gambling area.

Pennsylvania, New Jersey's neighbor reveling in the success
of new casinos and its slot machine parlors, is seeing
downturns in tax collections from casinos open more than two
years, according to analyst Lucy Dadayan at the Rockefeller
Institute of Government.

And Nevada, a pioneer of legalized gambling in America and
the home to the famous Las Vegas strip, has the biggest gap of
any state between spending and income as a percentage of its
budget, according to the Center on Budget and Policy Priorities
think tank.

Big casinos run in Las Vegas and other U.S. markets by
overly indebted entertainment corporations are tumbling into
receivership and aggravating Nevada's sky-high jobless rate of
14.2 percent, the nation's worst.

Patron spending at casinos not operated by Native Americans
peaked in 2007 at $34.13 billion, just before the start of the
last recession, and last year tallied only $30.74 billion,
according to the American Gaming Association trade group.

Moody's Investors Service said in a recent report the
casino industry had never endured a shakeout as severe as the
the last three years and a full-throated return of gamblers to
slot machines and gaming tables was impossible to forecast.

But gambling, whether at new casinos, repurposed racetracks
or with video devices, holds center stage in Northeastern and
other states as a possible means of replacing state revenue
lost to high unemployment, diminished consumer and property
sales taxes and other recession woes.

RUSH FOR TAXES, JOBS

Advocates say gambling brings in taxes and creates jobs.

"What we are seeing now is a tipping point," said economics
professor Bill Eadington of the University of Nevada in Reno.
"Until two or three years ago, there was reluctance in some
states worried about social costs to let gambling expand too
much. That's no longer the case."

Political leaders in Massachusetts largely agree on okaying
casinos in the state but are deadlocked over whether to permit
slot machines at racetracks.

Pennsylvania authorized table games in July at its slot
machine parlors, which had delivered $1.2 billion in taxes to
the state in the 12 months through June. Much of Pennsylvania's
gambling bounty comes from punters who would otherwise visit
Atlantic City, where July's casinos take was 5 percent off a
year earlier's revenues.

Operators in Maryland this week rolled out slot machines
and are working toward an autumn opening of the state's first
casino along an interstate -- shortly after three racetrack
casinos in adjacent Delaware added table games.

Ohio recently cleared the way for casinos, and voters in
Maine this November will decide on gambling in a referendum.

All together, at least two dozen states have considered
expanding gambling in the last two years, even as revenue at
states and local governments from all forms of legal gambling
declined by 2.9 percent in fiscal 2009 from fiscal 2008,
according to the Rockefeller Institute in Albany, New York.

State governments' interest in gambling as a revenue
source, typically good for about 3 percent of annual revenue in
states that allow and tax it, picks up dramatically in bad
times as tax revenue sags, according to Eadington.

"What happens is that the high-road arguments against
legalized gambling evaporate. They don't have the same cache in
bad times," Eadington said.

Governments, including the federal government actively
looking at permitting online wagering, will likely legalize
additional types of gambling, especially if casinos stall
financially, according to Eadington.

"There's convenience gaming, such as in bars; video
lotteries; sports betting and Internet gambling," Eadington
said. "California even looked at interstate poker."

Dadayan, who is working on a new study of states' gambling
revenue, said the sector's growth may be tapped out, both for
existing operations and states that may enter the business, at
least for the immediate future.

"The market has reached a saturation point, if the casinos
keep coming out with the same type of gaming," Dadayan said.
"If they keep the same type of gaming, in terms of the same
table games and the same machines, the market for those sorts
of activities may have reached the saturation point."
(Additional reporting by Ciara Linnane and Joan Gralla in New
York and Karen Pierog in Chicago, editing by Philip Barbara)