NEW YORK (Reuters) - New York City could be on the hook for as much as $7 billion if it cannot revive a faltering deal to develop one of the last large vacant land tracts in Manhattan, a credit rating agency said on Friday, while Mayor Michael Bloomberg vowed that the deal is not dead.

The estimate by rating agency Standard & Poor's, which reflects the city's decision two years ago to sell $2 billion of bonds backed by various payments that the development was expected to produce, came a day after talks between the state's Metropolitan Transportation Authority and developer Tishman Speyer collapsed.

Bloomberg, however, speaking to reporters in London, said, "The plan isn't dead by any means."

Tishman Speyer's plan to develop a mix of commercial and residential towers on the MTA's 26-acre Hudson Yards rail site in west Midtown Manhattan included an extension of the No. 7 subway line.

Bloomberg, said he previously told Jerry Speyer, Tishman Speyer's chairman, to hold out for the No. 7 subway link that the city will pay for but that the MTA will build.

Bloomberg said that Speyer "raised this issue and I said, 'If I were you, I would make absolutely, positively sure that we are going to build that subway before I put a dime of my own money in."'

Bloomberg, noting that London's Canary Wharf development was a costly failure for the original developer because a new subway link was delayed, vowed that will not happen in New York.

"It will be so far along before I leave office that nobody's going to be able to stop it," he said.

Bloomberg's term as mayor expires in January 2010; because of term limits, he cannot seek reelection.

The Fiscal Policy Institute, a New York-based think-tank, meanwhile, said the project threatens Bloomberg's efforts to make lasting improvements in the city's finances.

"The interruption that we're seeing in the Hudson Yards development means that the city's budget in the next few years will have the added burden of paying the debt service on the No. 7 subway line, threatening the mayor's otherwise respectable or responsible legacy of fiscal prudence," said James Parrott, the institute's chief economist.

The MTA blamed Tishman Speyer for the failed talks, saying that Tishman Speyer wanted to delay closing the deal for the eastern half of the tract until the western half is rezoned to its liking.

The rezoning process is uncertain and often lengthy.

Tishman Speyer said it still looks to resolving its differences with the MTA. "We look forward to meeting with the Metropolitan Transportation Authority on Monday. We still hope to be able to complete this deal and reach an agreement that satisfies the needs of everyone," Jerry Speyer and Rob Speyer, his son and the company president, said in a joint statement.

A spokesman for the MTA, which wants the city pay for any cost overruns for the new line, had no immediate comment.

The city must pay the interest on the bonds it sold for the subway link and on another $1 billion of debt it may sell to pay for elevating streets as well as water and sewer lines.

The longer it takes for the city to drum up the cash it had expected from the project, in the form of payments as opposed to taxes, for example, the worse it is for its budget.

"You're talking about a higher degree of uncertainty as to the cashflow ... Most likely there will be a delay," said Evan Rourke, a municipal bond strategist for M.D. Sass.

Bloomberg last week slashed the city's projected spending and slowed building projects as he revised his $57 billion budget, saying Wall Street's recent slide will hurt tax revenues.

So far, the city has paid zero interest on the subway debt, a city comptroller spokeswoman said. Interest on the cash it raised but has not spent, coupled with fees and other payments, saved it $29 million this year. The new budget calls for a $27 million payment -- not as much as the $86 million forecast.

Tishman Speyer, in winning the bid to develop the site, offered $39 million more than Vornado Realty Trust ,and the MTA now could reopen the bidding. But the city's real estate market has cooled with the economy, so the land now might fetch a lower price, Parrott noted.

(Editing by Leslie Adler)

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