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UPDATE 2-Maine governor rejects latest budget deal, ready for shutdown

(Adds governor's opposition to latest budget)

June 30 (Reuters) - Maine Governor Paul LePage said on Friday he would reject the latest budget deal by a bipartisan group of legislators, warning that most of the state government would shut down without more spending cuts.

The second-term Republican said repeatedly this week that he would be ready to close down non-essential government services as the July 4 holiday weekend starts if the lawmakers cannot agree on a $7.055 billion two-year budget that would require no new taxes.

The deal reached late on Thursday called for $7.1 billion in spending.

"I'm out of ink," LePage told reporters in the state capital of Augusta. "There will not be a signature on a budget that increases taxes."

The full legislature was due to vote on Friday, the day after a six-member bipartisan budget committee reached a deal that would repeal a measure that voters approved in November to impose an additional 3 percent income tax on state residents who earn more than $200,000 a year. The proposed budget also increases public education funding by $162 million.

The leaders of Maine's Democrat-controlled House of Representatives and Republican-controlled Senate supported the measure, but it was unclear if they could garner the two-thirds support needed for passage.

Even if they do, state law gives the governor 10 days to respond to any budget passed by the legislature. LePage said on Friday that he was ready to wait that long before vetoing any budget that raises taxes. Most of the government would shut during that time.

Without a shutdown, "I lose all my leverage for negotiation for the next 10 days," LePage said, adding that he did not think lawmakers could reach a budget deal on Friday that he would accept.

State police, parks and all offices responsible for collecting revenue would continue to operate during a shutdown, LePage has said.

The state's Democratic House speaker urged lawmakers to back the budget deal.

"In a divided government, compromise is the only option," Speaker Sara Gideon said in a statement.

A Maine advocacy group sued the state in federal court on Thursday, seeking an order that would ensure that public assistance payments continue uninterrupted to the 450,000 people, about one in three residents, who receive them.

In 1991 Maine's government shut down for several weeks due to a budget impasse, and lawmakers reached a deal only after furloughed state workers picketed the capitol.

(Additional reporting by Brendan O'Brien in Milwaukee; Editing by Richard Chang and Lisa Von Ahn)