California has more than 300,000 inmates in its prisons

Governor Arnold Schwarzenegger has just negotiated a new pay package with the state's prison staff, part of his ongoing attempts to cut the budget.

But Judge Thelton Henderson has told Mr Schwarzenegger that the deal cannot go ahead, and that courts could take over.

Such a move would be unprecedented in US history, observers believe.

California's prison system is a huge enterprise, with 300,000 inmates in the care of 49,000 staff in 32 facilities.

Budget battle

Mr Schwarzenegger's agreement with the California Correctional Peace Officers Association was part of his programme to rebuild the state's tattered finances.

Mr Schwarzenegger says state finances are his first priority

He was able to postpone pay rises promised by his predecessor in return for giving staff a greater say in prison management and working conditions.

His office hopes that the deal could save up to $300m.

California needs to save billions of dollars, as well as raise billions more by borrowing, in order to make massive debt repayments that fall due this year.

Systemic problems

The judge, meanwhile, said the deal violated the principles of prison management.

The California Department of Corrections has been repeatedly criticised for its wasteful finances, and widespread allegations of corruption and slackness among prison staff.

Judge Henderson attacked what he said was "a code of silence and the failure to discipline correctional officers has been condoned for many years by the highest level of California officials."

By giving the union more power to make its own rules, Mr Schwarzenegger would only exacerbate the systemic problems, the judge warned.

Mr Schwarzenegger's staff hope to negotiate a solution to the stand-off.