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Concern that the state may resort to borrowing money from local governments is weighing on local issuers' budget and financial plans, including their debt plans, Ciocca said.

"It's a pretty nasty situation," Ciocca said "It's why issuance is so small in California right now ... There is so much uncertainty as to what the financial situation is going to be at the local level."

"Every time bad news comes out, the front end of the curve gets hit hardest," Vonella added, noting California's fiscal crisis and its need for short-term debt has cast a gloom over sentiment about the near-term prospects for stability taking hold on state finances.

"There is a fear of excess short-term supply, that revenue anticipation notes would create pressure in that area of the curve and then there are short-term risk factors, which require more return in that sector of the curve," Vonella said.

In recent weeks estimates of the state budget's gap have been revised up, the state controller has warned the state is nearly out of cash, and Democratic and Republican lawmakers clashed over spending cuts and revenue increases.

And this week, Standard & Poor's placed $67.1 billion of California's debt on alert for a possible credit ratings cut, which could complicate the state's bond plans and increase its borrowing costs.

Spreads on California's general obligation bonds have widened as its budget crisis worsened and may widen further with Governor Arnold Schwarzenegger and lawmakers debating how to plug a $24.3 billion shortfall, analysts said on Wednesday.