California's water shortages have been compounded by a federal court order to limit pumping water from the state's San Joaquin-Sacramento River Delta to protect a species of fish.

The delta area east of San Francisco is the state's fresh water hub. Its water is conveyed across the state, including as far away as Southern California.

California's 2009 Drought Water Bank will buy water primarily from local water agencies and farmers upstream of the delta and make it available for sale to public and private water systems expecting to run short of water next year.

The last time California's Department of Water Resources set up a water bank was in the early 1990s and the agency plans much more strict guidelines for its new effort, said Wendy Martin, the statewide drought coordinator for the agency.

"We will be paying closer attention to ... making sure water is being used for the greatest and highest public service. We're not going to let people take water and use it for frivolous reasons," Martin told Reuters by telephone.

She noted that agencies buying water through the bank will have to commit to a 20 percent reduction in overall water use.

Schwarzenegger said the program will help ease water shortages if California's drought presses on and he once again urged lawmakers to agree on a bond bill for financing an expansion of the state's water storage and delivery infrastructure.

"California's drought is impacting our economy, our agriculture and our families, and an end to these dry conditions is nowhere in sight," he said.

"While we are taking action to address the state's drought situation, there remains an urgent need for Californians to step up conservation efforts and for the legislature to pass a comprehensive water plan that will ensure California has the water it needs to keep our economy strong and our people working," Schwarzenegger added.

The Republican governor has threatened the Democrat-led legislature he will not sign any of its bills until it crafts a state budget -- now more than two months overdue -- but he will make an exception for legislation approving state debt for water infrastructure, which he wants to put to voters as a ballot measure, said spokeswoman Lisa Page.

Schwarzenegger and US Sen. Dianne Feinstein, a Democrat, have teamed up to promote a US$9.3 billion plan to lawmakers that would address the delta's environmental problems while expanding the state's water works.

Their plan and rival plans have been sidelined in the legislature as lawmakers haggle over a state budget.

"Right now the No. 1 priority is passing a responsible budget. No talks are taking place on water," said Alicia Trost, a spokeswoman for Senate President pro Tem Don Perata.