ST. PAUL, Minn. - Minnesota state government is facing a $5.27 billion budget deficit over the next 2½ years, forcing difficult choices in the upcoming legislative session and maybe even sooner.

State leaders announced the deficit on Thursday at a news conference where they described the underlying economic conditions as the worst in 25 years and possibly dating to World War II.

"The economy, as is no secret to anyone, has body-slammed our state budget," said Tom Hanson, commissioner of Minnesota Management and Budget.

The deficit includes a $4.85 billion shortfall for the upcoming two-year budget cycle, plus a $426 million gap for the current budget that ends in June. In dollars, that's a bigger hole than the state has ever faced. As a share of the state budget, the deficit about matches the red ink of 2003 but isn't as bad as a shortfall in the early 1980s.

Gov. Tim Pawlenty ordered most state agencies to show him how they could shave 10 percent of spending - not including prisons, state troopers, crime labs or military programs. He also notified legislators he may cut spending on his own to tackle the shortage in the current budget, as state law allows.

The Republican governor repeated his longstanding opposition to raising taxes, noting that even with the shortfall the state is projected to collect revenues of $32 billion in the upcoming cycle.

"There is no deficit if we live within that amount of money," Pawlenty said at a Capitol news conference.

Minnesota's constitution requires a balanced budget by the end of each two-year budget cycle. Lawmakers don't have a lot of options because they nearly drained reserve accounts earlier this year.

That's led to some unconventional ideas, such as starting the budgeting process from scratch and privatizing the Minneapolis-St. Paul International Airport.

Pawlenty is due to release his budget plan in late January. He has said it's time for "quantum change."

There's a chance lawmakers and Pawlenty could fix the short-term problem this month, allowing them to focus entirely on the bigger gap when they convene their 2009 session on Jan. 6. Pawlenty could empty the state's rainy day fund and cut spending to do that.

But many Democrats say they want the Legislature to be involved. Pawlenty said he would meet with leaders Friday to discuss quick legislation to erase the immediate shortfall.

Demonstrators for the poor ringed the crowded Capitol conference room where the deficit was announced, briefly drowning out State Economist Tom Stinson. A man held a sign saying "Help for the needy" in a window as Stinson went through the litany of bad economic news.

Stinson said the recession driving Minnesota's problem will be long and the worst since World War II, with a slow recovery.

"The bottom line - without getting into too many gory details - is this recession will be different," Stinson said, adding, "We have a significant problem looking out into the future. We are going to lose a lot of jobs."

Stinson said he expects another 58,000 lost jobs in Minnesota between now and the end of the recession. And he warned it could get worse, given problems in the housing sector and the aging population.

A new forecast will be issued in late February.

Hanson said Minnesota finds itself with plenty of company, with at least 41 states experiencing deficits. "We're lucky we're not California," he said, referring to that state's $11 billion shortfall.

Groups advocating for everything from local governments to the state's courts to early childhood went into a defensive crouch in anticipation of losing aid.

"A bad economy is exactly the wrong time to dump the best earning stock in your portfolio," said Todd Otis, who heads the early childhood education group Ready 4 K.

"Cities around Minnesota provide the basic services of government that citizens expect," said St. Paul Mayor Chris Coleman, rattling off police, firefighting and snow plowing as examples. "Cutting aids to cities would have a devastating effect because cities have been cutting since 2003."

What's even more challenging, he said, is that local governments have set their tax levels for 2009, so they would have to respond to any state aid cuts with cuts of their own. In a city like his, Coleman said half of the budget goes for police and fire services.

"There is no easy way to solve this, but there are wrong ways," said Coleman, a Democrat said to be exploring a run for governor in 2010.

State budget director Jim Schowalter said the government has spent only $6 billion of the current year's $17 billion budget, with checks yet to be cut for payments to public schools, cities and counties and health care programs. A $340 million payment to local governments is due to go out late this month, but Pawlenty could delay that or other payments.

The governor said the next budget will be built from the ground up, instead of taking the current budget as a starting point.

"We're going to start with zero and build our way up to 32 and prioritize along the way up, which means there's going to be many things at the end that aren't as important as at the beginning," he said.

Pawlenty offered little on his proposals to address the longer-term deficit, beyond saying his priorities are the military and veterans, public safety and schools.