Sacramento: California governor Arnold Schwarzenegger Wednesday declared a fiscal emergency as lawmakers failed to pass a budget to close the state's $24.3 billion budget gap.

The emergency means that the state may start issuing IOU's instead of checks as soon as Wednesday. Schwarzenegger also ordered state workers to take a third unpaid day of leave every month, to help save the largest state in the US some $1 billion annually.

Schwarzenegger declared the emergency after lawmakers failed to agree on a balanced budget prior to the start of the fiscal year which began Wednesday morning. The Democratic majority did pass a bill, but Schwarzenegger vetoed it because it contained tax increases and not the roster of cuts and political reform that the former action movie star has advocated.

"Though the legislature failed to solve our budget problem yesterday, rest assured that solving the entire deficit remains my first and only priority, and I will not rest until we get it done. I will not be a part of pushing this crisis down the road - the road stops here," Schwarzenegger said in a statement.

Schwarzenegger also vowed to veto every bill until a budget is passed.

In Washington, White House spokesman Robert Gibbs said the administration was eyeing California's crisis but had no plans to intervene. He touted the $144 billion that went to struggling states as part of broader economic stimulus package approved in February.

"There are a number of states that find themselves at the end of the fiscal year and required to pass budgets. We're certainly watching," Gibbs said in Washington.

The California economy generates some 13 percent of the US GDP and would rank in the world's top ten economies were it an independent state.

However revenues have been hard hit by the recession and the housing slump. California's State Controller John Chiang said he would be forced to begin issuing IOUs from Thursday to contractors and vendors, local agencies overseeing health programmes, as well as some people who receive state aid.