All 1,600 public schools on the island were closed two weeks before the end of the academic year, and 43 government agencies were shut down after last-minute negotiations between lawmakers and Gov. Anibal Acevedo Vila failed.

Acevedo blamed "legislative inaction" for the shutdown.

"As of 8 a.m. this morning, I don't have in hand a single legislative proposal that resolves this crisis," he told reporters.

The closure gave an unplanned holiday to 500,000 students and threw almost 100,000 government employees — including 40,000 teachers — temporarily out of work. The governor has said essential services, such as police and hospitals, would continue during the shutdown.

Unions planned protests outside the capitol in San Juan and elsewhere to protest the shutdown. Municipal governments, which provide services such as garbage collection, kept functioning.

Outside an elementary school in the Rio Piedras area of the capital, a sign advised parents to monitor news reports to learn when classes would resume. Juan Marrero, a shop owner near the school, said the shutdown would curtail his own business.

"They have to solve this quickly," Marrero said.

Puerto Rico has a $740 million budget shortfall because the legislature and the governor have been unable to agree on a spending plan since 2004.

Overnight, the Senate leader offered a compromise that would create a 5.9 percent sales tax, which he said would raise enough money to pay off an emergency $532 million line of credit the government needs to finish the fiscal year.

But that proposal failed to gain traction in the House of Representatives, where leaders said they opposed any sales tax above 5.5 percent — with 1.5 percent earmarked for municipalities.

Both proposals fell short of the 7 percent that Acevedo said was necessary to pay for an additional $640 million loan and avoid a partial government shutdown. Anything less that 7 percent would only postpone the crisis until July 1, when the next fiscal year begins, the governor said.

The island currently has no sales tax.

Members of the New Progressive Party, which controls the legislature, have blamed the governor for the crisis. The two sides never agreed on the 2005 or 2006 budgets, and the government is using the 2004 budget to operate as debts pile up.

The government is Puerto Rico's largest employer, with some 200,000 workers. Salaries make up about 80 percent of the government's operational costs.

In recent days, Puerto Ricans held protest marches aimed at spurring the politicians to reach an agreement.

"I think it's sad that it came to this, but I think they'll come to their senses after a few days of playing this game," said Hector Aguilo, 24, who lives in Guaynabo, just outside San Juan. "There are too many angry people who would be without their paychecks."