(Recasts with results of vote; adds new quotes from mayor)

By Hilary Russ

NEW YORK, March 26 (Reuters) - Hartford, Connecticut's fiscally distressed capital city, will get a much-needed lifeline after its city council on Monday approved a deal to have the state pay its debt.

The accord, part of a broader oversight plan that state lawmakers agreed to last year, calls for Connecticut to take over the city's roughly $540 million of general obligation debt.

The oversight deal and bailout helped Hartford avoid a bankruptcy filing. The aid was included in the state's biennial budget passed in October, nearly four months overdue.

Monday's vote comes just in time for the state - which has its own financial problems, including a $193 million budget shortfall - to make Hartford's April 1 debt service payment of $11 million.

Mayor Luke Bronin presented details of the aid package on Thursday to the city council, which voted unanimously to accept the deal at its regular meeting Monday night.

Half of the capital city's property is tax-exempt because of its high concentration of state, nonprofit, university or hospital-related property, making it hard to raise money from its tax base.

Bronin has already slashed spending and renogotiated labor contracts to help stabilize city finances.

Asked what message Monday's agreement sends to capital markets for future borrowings, Bronin said the city does not intend to issue new debt any time soon.

He expects necessary capital improvements to be paid for with operating funds, though budgets will be tough for years to come.

"Over the longer run, I hope what the markets see is continued discipline, continued commitment to fiscal sustainability and a continued partnership between the city and the state," Bronin said in a phone interview on Monday.

In exchange for the bailout, Hartford must agree to have its state-run review board approve its fiscal 2019 budget. The city must also provide ongoing financial reports to state officials and limit its borrowing so that years down the road it has only $100 million of debt outstanding.

Most of Hartford's general obligation bonds are insured.

Build America Mutual insures $103.2 million of the city's general obligation debt, and Assured Guaranty Ltd another $339 million as of the end of December, the most recent information available.

Both insurers declined to comment on the agreement.

The plan gives the state "tools to protect its investment," State Treasurer Denise Nappier said in an emailed comment to Reuters. Nappier is co-chair of the city's oversight board. (Reporting by Hilary Russ; Editing by Dan Grebler and Cynthia Osterman)