NEW YORK, US - NEW York Governor David Paterson was sworn in on Monday following the sex scandal that forced predecessor Eliot Spitzer to resign, and he confronted a state budget shortfall worsened by a faltering United States economy.

Mr Spitzer resigned last week for what he called 'private failings' after The New York Times reported he was under federal investigation for patronising a US$1,000-an-hour (S$1,400-an-hour) prostitute, leaving the job to Mr Paterson, who was the lieutenant governor.

With the state facing a budget gap estimated at up to US$5 billion and depending on a wobbly financial industry for its tax base, Mr Paterson flashed his famous sense of humour and introduced the dignitaries and family members present at the state capital in Albany with an air of celebration.

But he also referred to financial uncertainty after JPMorgan Chase agreed to buy stricken rival Bear Stearns for a rock-bottom price of US$2 a share on Sunday while the US Federal Reserve expanded lending to securities firms for the first time since the Great Depression.

He said the economy 'appears to be heading towards crisis' and promised to 'adjust our budget accordingly'.

'We are looking at an economy that is reeling,' Mr Paterson said. 'We have to battle the obstacle of doubt and uncertainty and we shall overcome it.' Mr Paterson, 53, is the first black governor of New York and is legally blind, unable to see out of one eye and barely able to see out of the other.

He inherits the responsibility of fixing a budget mess: There is a revenue shortfall estimated at up to US$5 billion on a US$124 billion budget.

Earlier this year, Mr Spitzer predicted the budget gap in fiscal 2012 would swell to US$8.8 billion.

The Brooklyn-born Paterson, who lives in Harlem, faces an April 1 deadline to produce a politically viable plan to raise the extra money through taxes or borrowing, or to cut spending.

'The situation that everybody is witnessing with the national economy, the impact of Wall Street and the financial markets can have a big impact on state revenues moving forward,' state comptroller Thomas DiNapoli told local NY1 television.

Mr Paterson told a news conference last week that Wall Street investment banks were 'under siege', the stock market was in a flux and 'we are looking at a recession'. -- REUTERS