California Governor Arnold Schwarzenegger said on Wednesday he was hopeful a deal with lawmakers to resolve the state's budget crisis by closing a $26.3 billion shortfall was near, perhaps even by the end of the day.

But Schwarzenegger, now a veteran of several lengthy budget battles marked by fits and starts, stalemates and partisan bickering, posturing and trash-talking, would not confirm an agreement was imminent.

The legislative leaders have shown willingness to make this budget work, Schwarzenegger said at a press conference in the state capital, Sacramento. I think that everyone, I get the feeling, has made compromises, and I think when you see that when you come to the meetings and you get that feeling that they're at the right place at the right time and the timing is perfect.

There's no nastiness in the discussions, no blowups, chairs flying and what usually are the routines, he added. There's none of that, so I think we have a good shot of getting the budget done today.

However, Schwarzenegger said both sides have not settled all their differences on plugging the state budget's historic gap.

There's still -- I have to just caution -- there's still some very important things that are not resolved, Schwarzenegger said. But you know, that doesn't mean that we cannot do it. I think, like I said, there's a will there to get it done.

The government of the most populous U.S. state began its fiscal year on July 1 with a massive budget shortfall brought about by the loss of more than a quarter of its revenues since last year because of the recession and rising unemployment.

California's government faced the prospect that without its books balanced, it would quickly run out of cash.

In response, state finance officials have been issuing IOUs to taxpayers owed refunds and vendors to preserve cash for priority payments, including the state's debt service payments to investors holding its bonds.

WALL STREET CONCERNED

The IOUs, issued only once before by California since the Great Depression, rattled Wall Street, which has also been concerned by drawn-out and sometimes heated budget negotiations between the state's Republican governor and leaders of the Democrat-led legislature.

Citing the budget crisis, Moody's Investors Service on Tuesday cut its rating on about $72 billion of the state's general obligation debt by two notches to Baa1, or three notches above speculative junk status.

Moody's said the rating may suffer further downgrades because of a growing risk to the state's ability to make priority payments. Without a solution to the budget gap, the risk to priority payments -- and eventually debt servicing payments to bondholders -- is increasing, Moody's said.

Fitch Ratings had cut to its credit rating on California on July 6, lowering it to BBB, just two notches above junk.

Schwarzenegger and top Democrats have essentially agreed to balance the state's books with deep spending cuts as the governor and the legislature's Republican minority have flatly ruled out tax increases. Democrats lack the votes to pass budgets and tax increases on their own, giving Republicans an effective veto on spending plans.

Schwarzenegger and top lawmakers were scheduled to hold budget talks Wednesday afternoon. Aides said they would press on with discussions over Schwarzenegger's proposal to pare education spending by suspending a two-decade-old voter-approved measure that locks in funding levels for public schools and his demands to include measures to fight fraud in welfare programs in a budget agreement.

California