The gambling slowdown that began early this year is taking a serious toll on Las Vegas, with banks, investors and private-equity funds growing as tightfisted as the consumers who are gambling less in the slumping economy.

Once believed to be recession-proof, casinos are proving to be highly vulnerable to the economic downturn, which is striking the industry at a bad time. Las Vegas is entering its lethargic summer season, and a boom-time frenzy of grand expansion plans and private-equity buyouts has left casinos laden with debt.

Now, Wall Street is treating many gambling companies like a roll of the dice, with debt default or bankruptcy proceedings looming as possibilities for some companies as cash flow shrinks.

The industry is facing what insiders and analysts call its biggest challenge in years. Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles.

"This is the toughest environment we've faced," says Gary Loveman, chief executive of global gambling giant Harrah's Entertainment Inc., referring to the economic challenges roiling the entire industry.

Casinos are being pinched by less access to cash as they grapple with predownturn expansion plans and billions of dollars of debt. Turnaround and bankruptcy experts say they are getting more calls from casinos than they have in years.

"The volume of interest in casino turnarounds and situations has dramatically increased in the last three months," says Tuck Hardie, managing director in the restructuring group at investment banking firm Houlihan Lokey Howard & Zukin. "The economy has fallen hard, and to a magnitude people didn't anticipate. There are development projects that are having trouble even getting construction financing."

Several casino companies have defaulted on debt or have sought bankruptcy protection, tripped up by costly land acquisitions and ambitious new development. Kentucky-based Tropicana Entertainment LLC filed for Chapter 11 bankruptcy protection in May, defaulting on $2.67 billion in bank and bond debt. Greektown Holdings LLC of Detroit and Illinois-based Legends Gaming, which has casinos in Louisiana and Mississippi, have also sought bankruptcy protection.

Other companies are sweating under debt agreements that require them to maintain minimum levels of cash flow, even during an economic drought. The public-debt market, spooked by four casino bankruptcies this year, reflects the concerns. Bond prices for a half-dozen casino companies, from Harrah's to small, Las Vegas-based Herbst Gaming, are trading at distressed levels, frequently below 60 cents on the dollar, on debt totaling about $5.3 billion.

The credit squeeze is bad news for companies in the midst of multibillion developments in need of more cash. Analysts say an extended economic downturn threatens to hurt the industry for years to come. Companies that postpone or halt property upgrades and maintenance could find it more difficult to lure customers and to charge premium rates for hotel rooms.

Shares of several gambling companies have tumbled dramatically this year, washing out billions of dollars in market valuation. Las Vegas-based Boyd Gaming Corp. has fallen to about $12 a share, a five-year low, from a high of $54 last summer. After topping $98 last fall, shares of casino giant MGM Mirage now trade below $35.

The public debt of Harrah's, which is highly leveraged after a $17 billion private-equity buyout last year, has traded as low as 52 cents on the dollar. Mr. Loveman, the chief executive, says Harrah's is profitable and is not in danger of default or a bankruptcy filing. The company, he says, is spending money to expand and improve existing properties, and is boosting visits to its regional casinos by chartering airplanes to fly in loyal customers.

Hard Hit

Credit-rating agencies have been hitting casinos hard. Moody's Investors Service, which rates $79 billion in debt at casino companies, has downgraded 17 casino companies this year. Eleven more are on review for possible downgrade, from small but storied Vegas names such as Golden Nugget to regional players like Penn National Gaming, which has 19 casinos, racetracks and riverboats across the Midwest and South.

"The casino industry is in the midst of what could be its most severe downturn ever," says Keith Foley, who covers casinos for Moody's. "After 9/11, everyone thought Vegas was immune to just about anything, and it is suddenly obvious and maybe kind of scary that it is not."

Mr. Foley tracks 55 gambling companies with combined revenues of about $52 billion. "The sector has grown up and is more susceptible than ever to economic downturns," he says. "Six months ago, all the bankers loved them. Now they are tightening up credit and terms on them."

Late last week, J.P. Morgan Chase & Co. casino analyst Joseph Greff lowered his estimates for operating cash flow for the industry's major players -- MGM Mirage, Las Vegas Sands Corp. and Wynn Resorts Ltd. -- because of what he wrote was "an unprecedented lack of visitation and spend-per-visitor visibility." Mr. Greff wrote that investors don't fully realize "the magnitude and duration" of the downturn.

Dangerous Situation

The gambling industry has survived economic famine before. But the current consumer-driven downturn, coupled with a recent industry shift away from gambling and toward luxury amenities, high-priced entertainment and dining, has created a dangerous situation for Las Vegas.

The problems are weighing heavily on gambling companies that cater to the local Las Vegas population with low-glitz, high-profit casinos built away from the tourist zone known as the Las Vegas Strip. Those companies thrived on the boom in southern Nevada's population, as families flocked to the area for jobs in the casino industry. But now those customers are holding back, pinched by a housing crunch and rising unemployment.

In April, revenues at casinos that serve the local market fell 9.5% from the year-ago period, according Mr. Greff's analysis of Nevada records. By comparison, revenues at casinos on the Las Vegas Strip fell 1.3% in April.

Among those hard hit by the local decline is Boyd Gaming, started in 1975 by Sam Boyd and his son, Bill. The publicly traded company is bidding to become a big player on the Strip, via a $5 billion casino development on 87 acres. The project, called Echelon, is slated to include five luxury hotels, a retail promenade and an exposition center.

Boyd is committed to funding $3.3 billion of the project, through a $4 billion credit line and its own cash. Despite the economic pressures and project costs, company officials say, Boyd has solid cash flow and a strong balance sheet. But Boyd has had to rely more on its credit facility as profits wane. Boyd reported a $32 million loss in its latest quarter.

The company carries $2.4 billion in debt. To complete the project, it is trying to secure more than $1 billion in additional financing with two joint-venture partners.

On Thursday, Standard & Poor's Ratings Services downgraded Boyd to negative from stable, saying the "failure to secure financing in the near term could pressure the company's ability to meet its targeted completion" for portions of the project. If the opening, which is scheduled for 2010, is delayed, it could "strain the company's ability" to generate enough cash to remain in compliance with its bank covenants, the ratings agency said.

A spokesman for Boyd said the company is currently negotiating a financing package for the bulk of the additional funding. "We feel really good about our ability to finance that part of the project," says spokesman Rob Stillwell, referring to a $950 million loan to develop two hotels in conjunction with Morgans Hotel Group.

Mr. Stillwell says Boyd hopes to secure the funding sometime this fall. "Assuming we get it done this year," he says, "it will not impact our opening plans."

Write to Tamara Audi at tammy.audi@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com