TRENTON, New Jersey (Reuters) - New Jersey Governor Chris Christie pulled state funding from a $8.7 billion rail tunnel between New Jersey and Manhattan on Wednesday, killing the largest U.S. public works project under construction.

In withdrawing funding for the project, which would have created 6,000 jobs, Christie came down firmly on the side of deficit cutting over economic stimulus, an issue dividing politicians before Tuesday’s congressional elections.

Christie, a Republican, originally withdrew funding for the tunnel on October 7, saying his state lacked the money to cover expected cost overruns that could reach as high as $4.8 billion, but he had been reconsidering the decision at the request of U.S. Transportation Secretary Ray LaHood.

“I cannot place upon the citizens of New Jersey an open-ended letter of credit,” Christie told reporters. “This decision is final.”

The project has been backed by Democratic politicians and commentators who argue the tunnel was badly needed to complement the single, century-old passenger rail tunnel linking New Jersey and Manhattan. Christie also endorsed the project repeatedly after taking office in January.

The tunnel controversy elevated Christie’s national profile. The fiscal conservative has been campaigning for Republicans across the country before next week’s congressional and gubernatorial elections and earlier this month won a Virginia Tea Party straw poll, topping Sarah Palin.

“I don’t think there will be any benefit to me politically,” Christie said.

“This is a dollars and cents issue. It’s not a philosophical issue,” he said.

NEW FEDERAL INCENTIVES

Christie said he met on Sunday with LaHood, who offered $378 million in increased federal funding plus two loan options: a $2.3 billion loan from a federal railroad fund and the possibility of $1.85 billion in financing from a public-private partnership.

The additional $378 million “didn’t come close to turning my head,” Christie said, rejecting the loan offers because they would have to be repaid.

John Wisniewski, Democratic chairman of the New Jersey Assembly transportation committee, called Christie’s decision “a monumental failure of leadership.”

“This historically bad decision will haunt New Jersey not just for today but for decades,” Wisniewski said.

Under the original financing deal, which was agreed to before Christie took office, New Jersey would put up $2.7 billion, the Port Authority of New York and New Jersey $3 billion, and the federal government $3 billion. Any overruns would be paid by New Jersey.

As part of Washington’s $3 billion, the tunnel got about $200 million in stimulus funds -- the largest amount under the Obama Administration stimulus program.

In canceling the tunnel, the state will lose the $6 billion in federal and Port Authority funds.

New Jersey’s economy depends heavily on commuters who work in New York City and financial analysts say the state’s economic growth will be impeded without the new tunnel.

Digging for the tunnel began in June but was halted by Christie on October 7. About $500 million had been spent so far.