By Christine Kearney

NEW YORK (Reuters) - New York Gov. David Paterson was sworn in on Monday following the sex scandal that forced predecessor Eliot Spitzer to resign, and he confronted a state budget shortfall worsened by a faltering U.S. economy.

Spitzer resigned last week for what he called "private failings" after The New York Times reported he was under federal investigation for patronizing a $1,000-an-hour prostitute, leaving the job to Paterson, who was the lieutenant governor.

With the state facing a budget gap estimated at up to $5 billion and depending on a wobbly financial industry for its tax base, Paterson flashed his famous sense of humor and introduced the dignitaries and family members present at the state capital in Albany with an air of celebration.

But he also referred to financial uncertainty after JPMorgan Chase & Co agreed to buy stricken rival Bear Stearns for a rock-bottom price of $2 a share on Sunday while the U.S. Federal Reserve expanded lending to securities firms for the first time since the Great Depression.

He said the economy "appears to be heading towards crisis" and promised to "adjust our budget accordingly."

"We are looking at an economy that is reeling," Paterson said. "We have to battle the obstacle of doubt and uncertainty and we shall overcome it."

Paterson, 53, is the first black governor of New York and is legally blind, unable to see out of one eye and barely able to see out of the other.

He inherits the responsibility of fixing a budget mess: There is a revenue shortfall estimated at up to $5 billion on a $124 billion budget.