By Elinor Comlay

ATLANTIC CITY, N.J. (Reuters) - New Jersey on Tuesday rejected Atlantic City's recovery plan, saying it was unlikely to achieve financial stability, setting the stage for a possible state takeover of the cash-strapped gambling hub.

The plan, which would cut costs, borrow money and raise $110 million through a land sale, did not go far enough, New Jersey Department of Community Affairs Commissioner Charles Richman said in his decision.

The blueprint failed to meet several necessary requirements, and city leadership "has had ample time to improve the city's financial condition yet has avoided doing so in any meaningful way," Richman wrote.

The city's property tax base plummeted over the last several years as increased gambling competition in neighboring states cut into the city's casino industry.

In a joint statement with City Council President Marty Small, Mayor Don Guardian called on the state to reconsider its decision.

"We will fight this until we cannot fight any longer," they said, adding that the city was reviewing its options.

Earlier on Tuesday, Atlantic City met its $9.4 million debt service payment but still owes another $7.1 million through the end of the year.

To take over city operations, the state's Local Finance Board, a division of the Community Affairs Department, must next consider whether to assume governing powers from local officials.

A department spokeswoman said she did not have information about how long that might take. The board next meets on Nov. 9.

Atlantic City, which has been under the state's fiscal oversight since 2010, tried to meet terms of a $73 million emergency loan from New Jersey earlier this year.

However, to avoid default on the loan the city council was required to dissolve its water authority, which it did not agree to do. That was another factor behind Richman's decision, he said.

The gambling resort slashed jobs, sold assets ranging from filing cabinets to city vehicles, and devised a plan to sell an abandoned airstrip to the water authority for $110 million. But it was not clear that the utility would be able to borrow to finance the acquisition, Richman said.

He said his decision was based on the content of the plan as well as what it lacked, such as a balanced 2017 budget, as required. It also underestimated debt service costs by about $18 million, he added.

(Additional reporting by Hilary Russ in New York; Editing by Matthew Lewis and Richard Chang)