NEW YORK, Dec 31 (Reuters) - California State Controller John Chiang warned state agencies that unless the governor and legislature resolve a budget dispute, his office will be forced to issue IOUs as early as Feb. 1.

"IOUs may have to be issued in lieu of salaries and per diem payments to 1,700 legislators, state elected officers, judges and their appointed staff, as well as tax refunds owed to individuals and businesses," Chiang said in a letter released late Tuesday.

State officials have warned for some time that California could run out of cash by February. The state is facing a $15 billion cash shortage by the end of its fiscal year in June unless officials plug an $11.2 billion budget gap.

The state, the world's eighth biggest economy and the largest issuer of U.S. public debt, is facing an even more alarming $40 billion deficit through mid-2010.

State Treasurer Bill Lockyer said last week that California is having trouble selling debt as municipal bond investors are wary of its budget problems and demanding an expensive premium. For more, see [ID:nN24276417].

Standard & Poor's cited declining revenues in a recent note placing the state on review for a possible downgrade of nearly $47 billion of general obligation debt.

Republicans and Democratic lawmakers have been deadlocked over how to close the budget gap.

(Reporting by Ciara Linnane; Editing by Chizu Nomiyama)