This is part of a special Reuters package on the strain on state and city finances during the recession.

By Jim Christie

SAN FRANCISCO, June 30 (Reuters) - California prepared on Tuesday to resort to issuing IOUs as the giant but cash-strapped U.S. state struggled to approve a new budget in time for the new fiscal year that begins on Wednesday.

The IOUs, which are notes promising payment to vendors and local agencies, or shutting down some public services, are among measures that California and other states may have to rely on as they contend with staggering budget gaps caused by the U.S. recession.

Several U.S. states are due to start their fiscal years on July 1 with budget talks at an impasse. California, the most populous state, is especially hard hit.

The Golden State, hit by a leap in unemployment and a crash in property values, is suffering its worst tax revenue fall since the Great Depression and faces a $24.3 billion budget deficit.

"It's been a sort of perfect storm, of a very deep recession hitting us and exposing the weakness of depending on revenue sources sensitive to economic cycles," labor lobbyist Barry Broad said.

Fixing the massive budget gap "is going to require pain. That's the only way out of it," added Jack Pitney, a professor of government at Claremont McKenna College.

California Governor Arnold Schwarzenegger insists on deep spending cuts. But Democrats who run the Legislature want tax increases that Schwarzenegger and fellow Republicans oppose.