Facing a huge budget shortfall and skepticism on Wall Street about the state's creditworthiness, California officials are considering floating as much as $10 billion in bonds to stave off a cash flow crisis that some are warning could come as early as this summer.

Under a proposal being weighed in Sacramento, the state sales tax would rise by one-half cent to finance the new borrowing. California already has one of the highest sales taxes in the nation, 7.25 percent, and counties have the authority to increase that for their own use. For example, the sales tax in San Francisco is 8.5 percent.

Republicans in the Legislature have also expressed a willingness to borrow to help cover the budget shortfall, but they want to finance the new debt by dedicating part of current sales tax revenue to it.

California's budget for the current fiscal year and the next is $35 billion out of balance because of the collapse of the dot-com bubble and continued high spending. The administration of Gov. Gray Davis will issue revised numbers next week that officials say will show that the gap has grown by as much as $2 billion since the last estimate, in January.

On Monday, Governor Davis signed into law several bills that reduced the budget gap by $3.6 billion by borrowing to make payments to state pension funds and cutting spending on education and some health care programs. Mr. Davis, a Democrat, has warned that the rest of the gap cannot be closed without new taxes.

But he has not endorsed the bond proposal. That was developed by the California Department of Finance, the state budget office.

At stake is financing for virtually every state operation, including prisons, hospitals, state universities and parks. Local school districts have already issued 25,000 layoff notices to teachers, anticipating deep cuts in state education financing. Not all these teachers will be laid off, but such notices are required to those who might be dismissed. Local law enforcement agencies are bracing for budget cuts and police layoffs.

Fees for parks and college tuition have already risen this year, and further increases are expected. But the budget hole keeps deepening, in large part because state income tax revenue continues to fall below projections while the cost of providing social services continues to rise.

A separate agency would be created to issue the bonds. It would bear some similarity to New York's Municipal Assistance Corporation, the state agency that issued bonds to rescue New York City from potential bankruptcy in the 1970's. Those bonds, which originally had a 30-year maturity, may not be paid off until 2034, New York City and State officials said this week.

California officials are considering much-shorter-term debt, perhaps five years, hoping that the fiscal crisis is a temporary hangover from the high-technology roller coaster of the past five years. But Wall Street is watching Sacramento closely, financial analysts say, and is likely to impose high borrowing costs on the state unless the budget problems are addressed with structural changes and not temporary bandages.

California's bond rating from Moody's Investors Service is A2, a mediocre rating shared by only two other states, Louisiana and New York. All other states are several grades higher, a Moody's official said. Moody's has downgraded California three times since the energy crisis of 2000-01 and the collapse of the technology bubble at about the same time.

Ray Murphy, chief California analyst for Moody's, said the rating agency was withholding judgment on various budget proposals circulating in Sacramento. But Mr. Murphy said the Republican plan to divert part of existing revenue to pay interest on a new bond issue simply postponed the day of reckoning.

"Deficit financing just pushes the problem out for another year," Mr. Murphy said. "So it doesn't eliminate the problem. They're still going to have to deal with the imbalance in fiscal 2005."

He said that bond underwriters - who set the interest rate for new debt and thus determine the state's cost of borrowing - would look more favorably on a plan that raised new money and dedicated the revenue to repaying the bondholders.

In January, Governor Davis proposed a budget that included $8 billion in increased taxes on income, sales and tobacco products to cover part of the shortfall. It has gone nowhere as Republicans in the Legislature have fiercely resisted the tax increases, saying that the state's fiscal problems are caused by excessive spending, not insufficient taxation. Republicans have proposed cutting state spending across the board by 7 percent to 10 percent.

Democrats dominate both the Assembly and the Senate but do not have the two-thirds majorities necessary to pass a budget without some Republican votes.

Representative Dave Cox, the Republican leader in the Assembly, said his caucus remained adamantly opposed to raising taxes to address the budget crisis. But Mr. Cox said Republicans were willing to consider some form of borrowing.

"While we don't like borrowing money to finance the deficit," he said, "paying the money back over five years is far superior to raising taxes that will further stymie the economy and deter our economic recovery."