Announced Wednesday by the attorney general’s office, the settlement resolves a dispute over free slot-machine play given out as coupons and bonuses to casino patrons.

The tribes will collectively pay the $25 million to the state as part of the settlement agreement. The agreement also allows for the free play revenue to now be counted as wagers that should be calculated into the tribe’s monthly contributions to the state.

”The tribes have commendably agreed to a settlement that serves all interests - enabling all to benefit from successful promotional programs,” Attorney General Richard Blumenthal said in a statement. “We avoid a lengthy court battle - with millions of dollars frozen in bank accounts - and enable more jobs, more competitive casinos and more financial opportunities.”

Foxwoods Resort Casino, which is owned by the Mashantucket Pequot Tribal Nation, introduced in 2006 a promotion that sent patrons $50 “Free Slot Play” coupons. About a year later, Mohegan Sun initiated a similar promotion.

The money lost in the slot machines was not accounted for as revenue, state officials said.

State officials contested that the use of the free play coupons and bonuses were wagers and should be counted as revenue. Mashantucket Pequot officials disagreed and the state sued the tribe in 2006 seeking the lost revenue.

The settlement also, in effect, limits the free slot play promotions that the casinos could give out, unless they are willing to pay more to the state. The settlement includes an agreement that if the total amount of the free play coupons or credits played in a month exceeds 5.5 percent of the tribes’ gross operating revenue from their slot machines, the tribes will pay the state 25 percent of the face amount of the coupons or credits used that exceeds 5.5 percent.

Both tribes agreed to deposit a percent of the free slot play revenue in an escrow account while the matter was settled.

As of July 31, the tribes had escrowed slot revenues of nearly $50 million - 25 percent of the face value of the redeemed promotional coupons and bonuses. The Mashantuckets had set aside about $38.5 million while the Mohegans had escrowed $11.4 million, according to figures the casinos reported to the state Division of Special Revenue.

The state did not take action against the Mohegan tribe because it reached a separate agreement that the tribe would abide by the outcome of the terms of the settlement or court order with the Mashantuckets.

”We’re happy that once again our two governments have proven that the way to resolve issues is through communication,” said Chuck Bunnell, the Mohegan Tribe chief of staff.

Paul A. Young, executive director of the special revenue division, said the settlement upholds the terms of the Tribal Gaming Procedures and Compact. Under an agreement between the state and tribes, the tribe will pay the state 25 percent of the “gross operating revenues” from its slot machines. The agreement defines those revenues as “the total sum wagered less amounts paid out as prizes.”

The tribe had argued that the “total sum wagered” only refers to money wagered by patrons and “not notional value assigned to coupons or credits.”

Attorney General Richard Blumenthal and the state Division of Special Revenue announced the settlement yesterday.

At issue were promotions by the Mashantucket Pequot Tribal Nation, which runs Foxwoods Resort Casino, and the Mohegan Tribe that runs the Mohegan Sun. State officials said Foxwoods offered some patrons coupons or electronic credits through a program called Free Play, and the Mohegan Sun had a similar promotion called eBonus.

The state said that 25 percent of the casinos’ gross operating revenues from slot machines should go to the state and that the tribes were required to contribute the money under an agreement in the early 1990s that allowed them to operate casinos in the state.

No money changed hands during the promotional slot use, but Blumenthal maintained that the state was still owed money for the transactions.

“It is used to gamble as a substitute for actual cash,’’ he said. “It is, in effect, money that people would otherwise spend out of their own pockets, so, in effect, they are wagering and it is effectively revenue.’’

The state started vying for a cut of revenue when the promotions began in 2006. Negotiations wrapped up over the past few days.

Bruce “Two Dogs’’ Bozsum, chairman of the Mohegan Tribal Council, said in a statement yesterday that the council was pleased the issue had been resolved.

A spokesman for the Mashantucket Tribe, Jackson King, said the agreement was in everyone’s best interest.

The settlement funds will come from an escrow account that includes money set aside monthly since the start of the promotions.

The programs at Foxwoods and Mohegan Sun bring in about $4 million and $2 million a month, respectively, Blumenthal said.

The money should come to the state within days, he said. It will go into Connecticut’s general fund.

”The state takes its piece of the slot machine revenue off the top, so we’re not worried about interference with cash flow,” budget chief Robert L. Genuario said. “We also do bill them for regulatory costs (and) we have an agreement on that; (there’s) no indication that that agreement would not be honored.”

The tribe, which owns Foxwoods Resort Casino and MGM Grand at Foxwoods, is seeking to restructure $2.3 billion worth of debt. It could default Monday on the terms of a $700 million line of credit with a syndicate of banks.

The slots payments are required for the tribe to operate a casino under the compact between the state and the tribe. The tribe paid the state just under $200 million last year and about $2.8 billion over the last 16 years, according to the state Division of Special Revenue.

Blumenthal said that the tribe’s “obligation to the state has a higher priority than their financial debts to lenders under the law,” and it’s in the state’s and lenders’ interest to see the casinos continue to operate.

”Our hope is they avoid default, because it could negatively impact employment and financial opportunity as well as the tribe’s own situation,” Blumenthal said. “And even if they do default, there is no reason to believe they would fail to pay their monthly slot revenue obligations, because clearly they would be violating the law if they did so.”

The Mashantuckets issued a statement Wednesday indicating they intend to continue to operate the casinos as they work to restructure their debt.

”We have sufficient resources to continue to operate our businesses as normal and it will be business as usual,” the tribe stated. “… We do not anticipate that the financial restructuring being considered by the tribe will affect our employees, customers, vendors or business partners.”

The state has a memorandum of understanding with the Mashantuckets and the Mohegans that girds the terms of the compact governing the tribes’ arrangement to operate casinos in this state. The Mohegan tribe owns and operates the state’s other casino, Mohegan Sun.

Earlier this month, the Mashantuckets paid $15.8 million in slots-revenue contributions to the state for July, said Paul Young, executive director of the Division of Special Revenue, the state regulator that oversees gaming. The next installment for this month is due Sept. 15, he said.

”This year, they’re coming in at lower levels,” Young said. “We project maybe $190 million this year. (But) a default on the bond (held by lenders) is not necessarily related to the slot contribution to the state. If the check doesn’t come in the mail, we would sit down with legal counsel and react accordingly. I clearly don’t anticipate that occurring.”

After a press conference at her office in the Capitol, Gov. M. Jodi Rell noted that the larger predicament the tribe is in is of concern.

The tribe is a sovereign nation and its casinos are on sovereign land, so only the tribe, according to state law, is allowed to operate them, Blumenthal said. The state could appeal to a federal court to enforce the memorandum of understanding, which has the force of state law, if necessary, he added.

Less drastic options than shutting down the casinos also exist, including a court order or putting money in escrow, he said.

Members of the Baltimore City Entertainment Group presented their plans for what they’ve dubbed the Celebration Casino to a state commission in charge of granting slots licenses.

So far, BCEG has only applied for a license to operate 500 slot machines. But the group has gained control of a larger and more visible parcel of land since submitting that application and now plans to ask the commission to install 3,750 machines, the maximum allowed in Baltimore under state law.

“It will be a unique, energetic gaming experience,” BCEG President Michael Moldenhauer told the commission. “This will truly prove to be Baltimore’s place to play.”

The group hopes to break ground on the casino this year and open it by early 2011. Of the $500 million BCEG believes the facility will clear that year, $330 million would go to the state in gaming taxes, and $15 million would go to the city, where Mayor Sheila Dixon hopes to use the revenue to lower property taxes.

Moldenhauer estimated that the casino would bring in $430 million annually to the state and $19.5 million to the city by 2015. It would create more than 2,300 construction jobs and more than 900 full-time jobs upon completion, he said.

Other developers have criticized BCEG for acquiring the more attractive land parcel after submitting its initial bid, saying they might have bid for Baltimore’s license if they had known that land was available. The site is along Russell Street, a major gateway to the city, and is just south of M&T Bank Stadium, home to the Baltimore Ravens.

But Moldenhauer said BCEG entered negotiations with the developers who previously controlled the land before submitting its bid and that other developers knew then about the parcel’s potential as a casino site.

“This was clearly a fair and transparent process,” Moldenhauer said.

The Maryland Attorney General’s office has determined that the Video Lottery Facility Location Commission has “broad discretion to consider changes in plans” from slots license applicants, commission chairman Donald C. Fry said after the meeting.

But Fry noted that BCEG has not yet formally submitted plans for the larger casino or paid the additional $19.5 million licensing fee that would be required to operate that many machines. The group paid a $3 million licensing fee when it submitted its initial bid and plans to pay the larger fee next month.

The commission took comments from the public after BCEG’s presentation. Only four people spoke, and none objected to the substance of the casino plan. Two were critical of the commission for scheduling meetings too early in the day for many people to attend.

Inside, it would have “neighborhoods” filled with slot machines; a 400-seat buffet-style restaurant that would turn into a nightclub in the evening; a 120-seat “chop house” and a 100-seat main bar. Designed to hold up to 5,000 people at a time, it would be open from 8 a.m. to 2 a.m, seven days a week.

The slots facility would provide the full-time equivalent of 926 jobs with an average salary of $41,000, for an annual payroll of nearly $38 million. Construction would create 2,332 more temporary jobs valued at $122.5 million in wages and benefits.

All of this activity is expected to generate $391 million a year in gaming taxes for the state, revenues of $17.7 million to Baltimore, $3.3 million in casino property taxes, $2.6 million in hotel taxes and $4.6 million in real property taxes.

That’s the developer’s vision for “Celebration Casino,” the proposed name of a two-story, $212.5 million, 3,750-machine slots facility planned to open by early 2011 on an 11-acre parcel off Russell Street, just south of M&T Bank Stadium

Representatives for the Baltimore City Entertainment Group, the team seeking permission to build the project, unveiled their plans yesterday during a meeting of the Video Lottery Facility Location Commission, a panel charged with deciding whether to approve the license application.

In outlining their project, BCEG team members said it would transform an old industrial district into Baltimore’s newest waterfront hot spot. “This will truly be Baltimore’s place to play,” said Michael Moldenhauer, president of BCEG.

The state commission, headed by Greater Baltimore Committee Executive Director Donald Fry, toured the construction site and held a public hearing Wednesday as part of a series of hearings on casino projects planned around the state. It previously has visited sites in Worcester and Cecil counties.

BCEG is the only team that applied to build a casino in Baltimore. It initially applied to build a facility with 500 slot machines but indicated it would want to increase that number over five years.

The hearing came less than a month after developers disclosed that they now want to build the casino on the old Maryland Chemical Co. property off Russell Street, rather than on a smaller parcel on Stockholm Street. With the larger site, they said they would be prepared to open the casino with 3,750 slot machines. They also said they would be prepared to amend their application to include more machines - and pay the state $19.5 million more in application fees, for a total of $22.5 million - by the end of September.

The commission took no action Wednesday. Fry said the panel is working to decide whether to approve the application by year’s end.

During an hourlong presentation, BCEG representatives also said:

•Celebration Casino would be designed to celebrate Baltimore, from the food served to the graphics on buses that shuttle patrons to and from downtown hotels.

•Besides a 200,000-square-foot casino, BCEG intends to construct a five-story, 2,500-space garage east of the casino. The garage would be also available for Ravens home games.

•For drivers, the main access to the casino and its garage from Russell Street would be from a widened Bayard Street, with possible secondary drive-in access from Worcester Street. The main pedestrian entrance to the casino would be from Warner Street, which would be closed to traffic.

•Local development team members include Kevin Johnson of Commercial Interiors in Hanover, construction; STV, engineers; James Britton, food and beverage service; and Sandy Hillman Communications, media relations.