MONTICELLO, N.Y.—Michael Taylor grew up in the Catskills Mountains as the slow demise of Borscht Belt resorts cast a long shadow over the region's economy.

And during the 1970s, like today, billboards lined the highways promoting casinos as the answer.

"We've been hearing that our whole lives," said Mr. Taylor, 46 years old, who owns a propane and heating-oil business in town.

Casino advocates in the Town of Thompson, in which Monticello is located, thought their chance finally had arrived with the approval last year of Las Vegas-style gambling for New York. But many here are now bracing for more disappointment after two groups abandoned their plans to bid on casino licenses in the Catskills.

"The frustration is very strong. It's been 40-some years," said Gary Schmidt, the chairman of a plumbing and heating company in Monticello.

Not long ago, Thompson seemed poised for success. The state process will award four casino licenses in three regions. Three groups signaled interest in submitting bids for projects within the town of 14,000 residents. But the state's decision to add Orange County as an eligible location—much closer to New York City than the Catskills—has unnerved people here. Two Catskills bidders who dropped out both cited potential competition from Orange County.

Robert Williams, acting executive director of the New York state Gaming Commission, sent a letter last Monday to Republican state Sen. John Bonacic, who represents both Sullivan County and Orange County, to calm the concerns.

"I firmly believe that any conclusion that Orange County has a competitive advantage over Sullivan County is just plain wrong," Mr. Williams wrote.

Randy Resnick, leader of Citizens for New York State Gaming, said he never anticipated Orange County would bid on a casino or believed it possible that no licenses would be awarded to the Catskills. "It's like a knife in the heart," Mr. Resnick said. "The intent was for counties like us."

The latest blow for the Catskills came last Monday when Foxwoods Resort Casino and Muss Development scrapped plans for a casino at the now-defunct Grossinger's Hotel in the Town of Liberty, not far from Thompson. Earlier this month, Connecticut developer Len Wolman and the Stockbridge-Munsee Community dropped their plans to submit a bid for a casino in Monticello.

Meanwhile, in Orange County, casino companies such as Caesars Entertainment, Malaysian-gambling firm Genting Group and real-estate developer Cordish Cos. and Penn National Gaming are planning to submit bids.

The Town of Thompson's hopes now rest with the two remaining potential bidders, both with track records in gambling.

The Mohegan Tribal Gaming Authority, which is working with Westchester developer Louis Cappelli to build a hotel at the old Concord Hotel site in Kiamesha Lake, said it still plans to submit a bid by the June 30 deadline.

"The siting board and gaming commission have to pick what's right for the state of New York overall," said Mitchell Grossinger Etess, chief executive of the Mohegan Tribal Gaming Authority and a member of the family that once operated Grossinger's Hotel. "Our goal will be to convince them that what's best for everybody is Sullivan County."

Empire Resorts, which owns the Monticello Casino and Raceway and is working with real-estate investment trust EPR Properties, says it also hasn't dropped its plans to bid on a casino for Thompson.

"We are going to trust that this process is not going to dash the hopes and dreams of the Sullivan County community," said Charles Degliomini, a spokesman for Empire Resorts.

In his letter to state Sen. Bonacic, Mr. Williams, of the state gaming commission, wrote that licenses will be awarded based on the proportionate economic benefit of a project for the host town, county and state as a whole. He added that a smaller project in Sullivan County, which has some of the worst economic conditions in the state, could have a higher impact on economic need than a larger project in Orange County

William Rieber, Town of Thompson supervisor, said new casino development was needed to diversify the region's job market. Health-care services replaced leisure and hospitality as the area's biggest industry after the resort hotels left, but they never quite filled the void left behind, he said.

The weak job market has been especially tough for young people, said Mr. Rieber, who also works in real estate. "I have trouble renting $650 apartments to these kids," he said.

Thompson has tried a number of ways to get a casino over the past 40 years. Numerous attempts to develop Indian gambling operations sputtered. Once, the Concord Hotel even devoted a whole floor to a gambling hall that never came to fruition. Mr. Grossinger Etess said his family was lobbying for casinos in the Catskills before they were legalized in New Jersey in 1976.

Mr. Taylor said the recent setbacks served as painful reminders of the unsatisfied ambitions of the past. "It's hardened people up here," he said. "It's almost created an entire society of skepticism."

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