(Updates with senate adjourning without passage of budget)
LOS ANGELES, Feb 15 (Reuters) - California lawmakers narrowly failed to pass a $40 billion budget on Sunday, casting doubt on Gov. Arnold Schwarzenegger's ability to prevent the nation's most populous state from sinking into the abyss.
Bleary-eyed senators in the state capital of Sacramento adjourned for the day after all-night horse-trading failed to generate the one Republican vote needed to ensure passage of the bitter mix of tax hikes and spending cuts.
California, the world's eighth-biggest economy, is constitutionally barred from running a budget deficit, and has begun forcing state employees to take unpaid leave.
State spending on infrastructure work has also largely wound down, adding to the drag on the broader U.S. economy, which appears to be facing a long and deep recession.
Budget negotiations will resume on Monday, said senate leader Darrell Steinberg, after taking pity on lawmakers who had been confined to their offices by party leaders.
In a surprise development, the budget plan collapsed about 5 a.m. on Sunday after one of Schwarzenegger's fellow Republicans withdrew his support.
The bill includes $14.4 billion in new taxes and $15.1 billion in spending cuts in a bid to close a $42 billion budget deficit the state's government faces over the next 17 months.
Residents of the "Golden State" face a 1 cent sales tax rise, steeper income and gasoline taxes and higher vehicle licensing fees. Some aspects face voter approval in May.
Republicans seeking re-election have faced pressure from constituents averse to tax increases, while Democrats are under similar pressure from voters to maintain spending on schools and healthcare.
California's treasurer has started delaying tax refunds and other payments because of the cash crunch.
The Republicans make up a minority of both the senate and the assembly, but the Democrats need some support from across the aisle in order to muster the necessary two-thirds majority.
Legislative leaders thought they had a tentative deal in place following several weeks of talks, but failed to gain the necessary 27 votes in the senate. Passage in the assembly is seen as less of a problem.
The budget, which extends through June 30, 2010, also has a reserve fund of $1.3 billion as well as a borrowing plan of $11.4 billion. If California receives at least $9.1 billion in new federal funds, the spending cuts would be trimmed to $14.4 billion.
The financial crisis gripping the government has grown so dire that earlier this month Standard & Poor's Ratings Services cut its rating on California's general obligation debt, which is backed by the state's general fund, to "A" with a stable outlook from "A+."
That left California, the biggest issuer of public debt, with the lowest rated GO bonds of any U.S. state.
It also adds to its borrowing costs, which may be considerable given the ambition of many state officials for boosting public works through routine forays in the municipal debt market for funds to bolster the state's finances. (Reporting by Deena Beasley and Dean Goodman, editing by Anthony Boadle and Martin Golan)