New York Gov. David Paterson last week nixed the controversial selection of Aqueduct Entertainment Group to develop and operate a video lottery terminal facility in Queens.

The decision came after the state Division of the Lottery declined to grant the company a gaming license.

The firm was to make a $300 million upfront payment to the state for the right to develop and operate the gambling facility at the Aqueduct racetrack.

The state in turn planned to sell $250 million of state-backed bonds to finance development at the facility.

The agreement’s demise opened a $300 million hole in the state’s budget just as the governor is considering delaying $2 billion of payments to push the current-year deficit into fiscal 2011, which begins April 1.

New York already faced an estimated $9.2 billion deficit in the current and next fiscal year.

Acqueduct Entertainment was selected from among four bidders in January by a three-person panel made up of Paterson, Senate Majority Conference Leader John Sampson, D-Brooklyn, and Assembly Speaker Sheldon Silver, D-Manhattan.  The selection process has prompted ongoing federal and state investigations.

Paterson, who was facing a potential primary challenge from Attorney General Andrew Cuomo, met with the politically influential Rev. Floyd Flake days after the pick. At the time, Flake had a financial stake in AEG, though he pulled out last week.

Paterson, who is no longer running for election, said at the time that he had done nothing wrong and defended the choice.

The governor’s office issued a statement calling for “the selection of the Aqueduct VLT franchisee be done pursuant to an expedited, transparent, apolitical and publicly accountable procurement process.”

The announcement came the same day Cuomo recused himself from a probe into Paterson’s alleged involvement in an aide’s domestic violence case and into the governor’s possible violation of ethics laws in acceptance of Yankees baseball tickets.

Cuomo appointed former Court of Appeals Chief Judge Judith Kaye to serve as special counsel in the investigation.

The attorney general  is expected to run for governor in the fall but has not announced his intentions.

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