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GALVESTON, Texas (Reuters) - First came Hurricane Ike, then the tidal wave from the economic collapse hit.
The steamy Texas island city of Galveston, an historic port known for palm trees, Victorian buildings and shipping cattle and oil to the world, now finds its economy clinging to a life raft.
Some leaders believe the only hope for the city of about 45,000 -- down about a third from its pre-hurricane population -- is to legalize gambling and open casinos that would lure in tourists.
The Gulf Coast city, famous as the site of the worst weather disaster in U.S. history in the form of 1900 hurricane that killed some 8,000 people, finds itself searching for ways to come back from a different kind of perfect storm -- the one-two punch of September's Hurricane Ike and the national economic crisis.
Its rapid decline in the past six months mirrors the plight of many American families and cities amid the worst economic downturn since the Great Depression. With head-spinning speed, a succession of crises has sapped its resources and left a once vibrant community teetering on the brink.
Cities elsewhere on the Gulf Coast have allowed gaming houses and seen a boost to their budgets, an attractive prospect for Galveston which is so strapped it can't afford to fix the lights at its baseball stadium or provide coffee at city council meetings.
The island's biggest employer, the University of Texas Medical Branch, has cut 3,800 jobs.
"Galveston has to put everything on the table as an answer for an economic recovery," said Allen Flores, president of the merchants association in the historic downtown Strand district and owner of Boomba nightclub. "We're dependent on tourism now more than ever."
Now, with shops in the Strand district fighting for life and tax revenues plummeting, business leaders say casinos would be an economic lifeline and attract passengers from giant cruise ships operated by Royal Caribbean and Carnival that dock in the city's port.
Houston, the fourth-biggest U.S. city, is 50 miles to the northwest, a short drive for potential customers who now must drive to Oklahoma or Louisiana to gamble legally.
When Ike crashed ashore, it swamped much of the island under 10 feet of water and carried away the Balinese Room -- a landmark beach-front nightclub where gangsters rubbed elbows with stars like Frank Sinatra at illegal gaming tables until Texas Rangers police shut them down in the late 1950s.
Gambling is banned in Texas, and the state legislature would have to act before Galveston casinos could be a reality.
Several casino-related bills are before the Texas legislature and are opposed by social conservative groups and Gov. Rick Perry. Texas voters would have to approve any scheme that lawmakers eventually endorse.
Many residents worry casinos will bring traffic congestion, crime and social ills. Some academics claim legalized gambling is a zero-sum game because its indirect costs equal or outstrip the money it brings in.
But lawmakers could be won over by the example of other Gulf Coast states, like Mississippi and Louisiana, where gaming revenues are a budgetary boon.
It wouldn't be the first time a major storm caused a state to rethink its gambling policies. After Hurricane Katrina hit Mississippi in 2005, state lawmakers waived a long-standing policy that limited casinos to water-based locations and allowed them to rebuild on dry land.
In Biloxi, Mississippi, casino gambling generated more than $20 million for the city's coffers in the 2008 fiscal year.
Galveston's leaders have yet to weigh in on the debate. But "gaming is definitely on the table," said city spokeswoman Alicia Cahill. An economic recovery plan that a citizens panel will present to city leaders in April will likely address it.
Harris Kempner, a city businessman, said casinos would take a decade to build and the island should rely on medical research as well as family-oriented tourist magnets like Moody Gardens and Schlitterbahn water park.
Reporting by Chris Baltimore, editing by Cynthia Osterman