SACRAMENTO, Calif. — Gov. Arnold Schwarzenegger and legislative leaders resumed work Saturday on bridging California’s $26 billion budget shortfall, with one lawmaker saying a deal was possible within the week.

The negotiations that began Friday after two weeks of inaction and partisan bickering were remarkable for their lack of acrimony. Aides to the governor and top lawmakers from both parties expressed optimism about the direction of the talks, even as they cautioned that much work remains.

“If things keep progressing the way they are, it’s certainly possible to have a vote next week,” Senate Minority Leader Dennis Hollingsworth told The Associated Press after emerging from a meeting with Schwarzenegger late Friday night, smelling of cigar smoke.

The Republican and Democratic leaders of the Assembly and Senate returned to the governor’s office Saturday morning for a closed-door session expected to last several hours.

Talks centered on the extent of budget cuts _ which are expected to range from $11 billion to $14.5 billion _ and what other measures to take to close the deficit.

The shortfall, which is the difference between the amount of tax money coming into the state and its previously approved spending obligations, amounts to more than a quarter of California’s general fund, its main account for paying operating expenses.

Schwarzenegger and Republican lawmakers also want reforms to welfare, pension, health care and in-home supportive service programs. They say preventing waste and abuse will save the state money, which in turn can be used to prevent cuts elsewhere in the budget. The governor’s office has estimated its reform proposals will save $1.7 billion this fiscal year alone.

Democrats have criticized the reform proposals as peripheral issues that do not have a direct effect on the immediate budget deficit. They also say Schwarzenegger has overstated the savings.

Despite the differences, both Democratic leaders appeared upbeat as negotiations restarted.

Assembly Speaker Karen Bass, who walked out of negotiations earlier in the week, said there did not appear to be any insurmountable obstacles to reaching a deal.

“It’s really just a question of us working through the complexity of this deficit, so I wouldn’t consider it a holdup at all. I think we just have not completed the work,” said Bass, D-Los Angeles.

The possibility of a breakthrough in resolving California’s mammoth budget shortfall comes a week after the state began issuing IOUs to thousands of vendors as a cash-saving move. State workers also have begun taking three days off a month without pay, cutting the salaries of more than 200,000 government employees by 14 percent.

The state’s fiscal picture has become progressively worse since Schwarzenegger and lawmakers passed the budget for the current fiscal year last February during an unusual midyear session.

Personal income taxes declined 34 percent during the first five months of the year, a slide that has accelerated as the recession continues to strangle California’s economy.

On Friday, the state controller’s office reported the state had spent $10.4 billion more than it collected in the fiscal year that ended June 30. It is now without sufficient cash to cover all of its payment obligations.

If the budget isn’t balanced by late August, the state will have to defer payments to its pension funds and may issue IOUs to state employees instead of paychecks.

The unprecedented drop in tax revenue is forcing Schwarzenegger and lawmakers to make difficult choices, with deep cuts proposed to education, health and social service programs.

At the same time, Schwarzenegger and Republican lawmakers are standing fast against additional tax increases, limiting lawmakers’ options for closing the deficit.

The two-year budget package approved in February increased sales, personal income and vehicle license taxes, and Republicans say the state’s economy cannot absorb additional tax hikes.

While the governor and lawmakers try to reach a compromise, some of the state contractors who are being issued IOUs will have to start scrambling to find banks that will cash the warrants. Bank of America Corp. and other major banks said Friday was the last day they will honor the IOUs, which cannot be redeemed until Oct. 2.

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Associated Press Writer Don Thompson contributed to this report.