By Elinor Comlay

ATLANTIC CITY, N.J. (Reuters) - Atlantic City, New Jersey's fiscally distressed gambling hub, stands to gain $100 million by selling a defunct municipal airstrip to the city's quasi-independent public water utility, Mayor Don Guardian and other officials said on Monday.

The land deal is part of a fiscal recovery plan that the city must present to New Jersey soon or else face a possible state takeover. The city's casino industry, and subsequently its property tax base, has shrunk drastically over the last five years because of gambling competition in neighboring states.

The much-needed cash from the water utility could help the beleaguered seaside resort city balance its 2017 budget, which was a requirement the state set when it issued a $73 million emergency loan earlier this year.

Atlantic City expects to present a recovery plan the week of Oct. 17 that will show it can pay down debt and meet its bills, Guardian told a news conference on Monday.

New Jersey officials have long said the city could make more money from the water utility, which is called the Municipal Utilities Authority (MUA), through privatization, leasing or some other means.

But city officials and the utility have resisted a sale to private operators, and the deal to buy the airfield could make such a sale less appealing.

The MUA would have to borrow to buy Bader Field, the defunct former airstrip owned by the city, saddling it with debt that would effectively be a poison pill for potential private buyers, Guardian said in a phone interview.

The MUA could also sell pieces of the airfield in the future to developers, meanwhile continuing to allow concerts and special events there, Guardian said.

"If you can wait, it's a wise investment long term," he said.

However, under the loan terms, the city had to agree to begin dissolving the MUA so that it could fully control and get more revenue from the utility.

The City Council did not do that, putting it in violation of the loan. The state gave it until Oct. 3 to fix the violation.

It is not clear whether the latest plan will appease New Jersey officials, fix the loan violation or gain support from the City Council.

If the state were to force repayment of the loan now, the city believes it could use more than $60 million from casino taxes to pay it back, Guardian said.

(Reporting by Elinor Comlay in Atlantic City; Additional reporting by Hilary Russ; Editing by Alan Crosby and Bill Rigby)