The governor of Michigan declared the city of Detroit to be in a state of "financial emergency" Friday and said he would appoint an independent overseer in an attempt to save it from financial ruin.

A state report last week concluded the city was close to financial collapse and experts fear it could become the biggest municipal bankruptcy in US history.

"I believe it's appropriate to declare the city of Detroit in financial emergency based on the review team report," governor Rick Snyder said during a town hall meeting at Detroit's Wayne State University. "It's not hard to justify that conclusion."

Under Michigan law, an outside manager could eventually lead the financially troubled city into bankruptcy, a proceeding that would make Detroit the most populous American city ever to do so. The emergency manager, once named, would have about 18 months to turn the city around before facing re-appointment.

A new law that goes into effect on 28 March means that the emergency manager would have the authority to break all the city's labor contracts, which is sure to lead to lengthy and bruising political battles.

"There's no precedent for a city this big," said Alan Schankel, managing director of municipal research for Janney Capital Markets.

Snyder did not reveal the name of the candidate and the city has 10 days to appeal the decision. He said his choice has "strong legal knowledge and financial knowledge" and was a "great people person". He said previous plans had collapsed. "We need someone who will make decisions too," said Snyder.

The decision marks a significant turning point in Detroit's collapse and comes ironically as parts of the city appear to be finally recovering from the recession and the collapse of the US auto industry.

Last week a state review team published a damning report on the city's finances that concluded state intervention was needed and "no satisfactory plan exists to resolve a serious financial problem".

The city council has fought over swinging budget cuts in the face of its declining fortunes. Snyder said he expects fierce opposition over the appointment. The majority of Detroit city council members have said they want to fight against the expected appointment of an emergency financial manager and are likely to fight bankruptcy proceedings too. Council members are now discussing hiring lawyers in anticipation of a legal battle.

Snyder said it was not time to fight: "Now is a time to call all hands on deck," he said.

Detroit has wrestled with financial problems for years. The shrinking auto industry and rising poverty have triggered a massive reduction in population from over 1m in the early 1990s to 700,000 in 2011, according to the US Census Bureau. In November, Moody's Investor Service put a negative outlook on the city's bonds and cited a host of imminent financial troubles facing the city, ranging from pressure to refinance its debt to "ongoing political instability".

In December, the city council attempted to avoid having the state appoint an emergency manager by trying to show financial discipline, including signing contracts with outside companies to find fraud in the city's health and workers' compensation contracts.

"They would need some pretty strong medicine," said Schankel of the takeover. "There are vast parts of the center of the city that are empty. It's pretty distressing."

Incomes have been falling in Detroit since 2007 and the poverty rate is nearly three times the national rate, at 36.2% (the national rate was 14.3%). Median household income in the city was $27,262 in 2011 (the national average was $52,762).

With tax revenues under pressure city officials have made a series of spending cuts. More than a thousand jobs have been cut from the city's payrolls since last June. Some areas of the city have turned off – and even cut down – street lights in order to save electricity.

The mayor's office says it has reduced spending to $1.1bn in the 2013 fiscal year from $1.4bn in 2009. The city has only managed to keep cash on hand in 2012 because of distributions from the state, according to a Moody's report.

"The picture is not all doom and gloom," Bing said in his annual State of the City address earlier this month. "Every day there is more hope and possibilities. Like many Detroiters, I, too, am a fighter. We can't, and won't, give up on our city."

Municipal bankruptcy filings, known as Chapter 9, are rare and complicated. In Michigan state officials have a say in whether a municipality can pursue bankruptcy. Several other towns in Michigan have emergency managers, according to Moody's.

Only 643 government entities have filed for Chapter 9 since the 1930s and most were taxing authorities not towns or cities.