(Atlantic City article updated with additional analyst commentary on new, proposed Atlantic City casino legislation.)NEW YORK (TheStreet) -- Atlantic City could get four new, smaller casinos if legislation being introduced on Monday is passed.

Pictured: Construction of Revel Casino, Atlantic City

Former Mayor James Whelan, who is currently a state senator, is introducing legislation that would allow four new casinos with at least 200 rooms in the New Jersey gambling hub. Right now, the minimum number of rooms allowed for a new casino is 500, and most have more than 1,000.

Some say changing the rules to allow smaller developments is patently unfair. "To me, it is somewhat disingenuous and bad political practice to change the rules making it less expensive to have casino operations after 500-plus room hotel casino resorts have invested significant capital following guidelines set," Sterne Agee analyst David Bain says.

The legislation comes as Atlantic City is in the midst one of its greatest downturns due to consumer cutbacks and the expansion of nearby regional gaming markets.

In February, gaming revenue in the state plunged 15.7% to $261.6 million.

Pennsylvania has been one of the biggest concerns for Atlantic City, especially as it legalized table games earlier this year. Games like blackjack and poker will be implemented in the state at Penn National Gaming's ( PENN) Hollywood Casino and Las Vegas Sands' ( LVSW) Bethlehem property, this summer.

Wynn Resorts ( WYNN) also took over a Foxwoods casino development in Philadelphia.

Bain does not see how boutique hotel-casinos will offset any of this additional competition.

There are 11 casinos on Atlantic City's Boardwalk, and adding four new developments will likely ignite a heated debate of cannibalization.

But newness to Atlantic City could also be a welcome facelift, as the last casino to open was the Borgata in 2003. There have been other developments slated, but none have yet to bear fruit.

"This legislation makes rational sense, since there isn't capital to develop larger-scale casinos that were demanded of the original laws," CreditSights analyst Chris Snow says. "This is a step in the right direction towards lowering the threshold to enter the market, which creates opportunity."

This legislation also comes at a time when most casino operators are shying away from the state. MGM Mirage ( MGM), for one, said earlier this month that it will sell its stake in the Borgata, which it co-owns with Boyd Gaming ( BYD).

New Jersey regulators have severely criticizes MGM's Macau business partner Pansy Ho, whose family reportedly has ties with Chinese organized crime. MGM apparently has decided Macau is the more lucrative opportunity, and plans to sell off its Borgata stake in order to pursue an initial public offering there without drama.

Pinnacle Entertainment ( PNK) also announced earlier this year that it is abandoning its plans to build a $1.8 billion casino on the Boardwalk, and subsequently put its 19 acres of land, which was formerly the site of the Sands Atlantic City, up for sale.

With the possibility of growth in Atlantic City waning, all eyes have been on the Revel development, which is currently under construction. In 2006, Morgan Stanley ( MS) purchased 20 acres of land next to the Showboat for $74 million. It partnered with Revel Entertainment to build the $2 billion Revel Casino.

But difficulty in securing the remaining $1 billion in financing has caused the opening of Revel to be delayed until 2011.

The proposed legislation is one of the many ways New Jersey has been examining to revitalize its casino industry. There have also been talks to allow slot machines elsewhere in the state, namely Meadowlands Arena.

Shares of casino operators are in the green on Monday afternoon. Las Vegas Sands is leading the rally, soaring 9.5% to $21.40. Wynn is spiking 6.2% to $76.17, MGM is rising 7.2% to $12.59, Boyd is advancing 5.1% to $9.49 and Ameristar Casinos ( ASCA) is gaining 6.2% to $18.16.

-- Reported by Jeanine Poggi in New York.

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