UPDATE 1-Revenues down in U.S.'s troubled Jefferson County

* County revenue down 10.2 percent in new budget year

* County faces multibillion dollar debt

* Revenue shortfall poses new headache for county (Adds possible sewer rate hike, paragraph 10)

By Melinda Dickinson

BIRMINGHAM, Ala., Dec 2 (Reuters) - Falling tax revenue in Alabama's debt-ridden Jefferson County is making it harder for its troubled government to run day-to-day operations, officials said on Wednesday.

Weak economic conditions pushed down revenue collection 10.2 percent, or $7.9 million, in October/November, the first two months of fiscal 2010. Collections are likely to continue to fall short of projections, the county's revenue department said.

Jefferson faces twin financial problems: a multibillion dollar debt run up earlier this decade as it tried to finance an upgrade to its sewer system and a short-term crunch surrounding its $808 million county budget.

Should the county go bankrupt, it would be the largest municipal bankruptcy in U.S. history.

"Until we get to April (2010) and a mid-year review, we do not know what we have in the way of money to help any department do anything," said county commission President Bettye Fine Collins at a meeting of county government leaders. "After the last payroll period, we had $400,000 left in the bank."

Falling revenue threatens the county's services, creating a fresh headache for an authority forced to cut operations and temporarily lay off 1,000 workers in August.

Jefferson County's revenue department said income was down $37.8 million in fiscal year 2009.

"Worsening economic conditions in Jefferson County are leading to a decline in sales taxes as unemployment continues to go up," Travis Hulsey, the county's acting finance director, told the meeting.

Wednesday's announcement did not address sewer debt because its finances are held separately and derive from revenue from the sewer system itself.

One option under discussion to increase revenue would be a further hike in sewer rates in January, a senior county official said, though residents complain the rates are already too high and the move would likely spark a political battle.

The county is unable to repay sewer debt and has entered into a series of forbearance agreements with creditors. It has engaged in long-running negotiations to try to reschedule payments at a lower rate.

(Writing by Matthew Bigg, Editing by Chizu Nomiyama) ((matt.bigg@thomsonreuters.com; +1 404 720-2891; Reuters Messaging: matt.bigg.reuters.com@reuters.net))