WASHINGTON – The Supreme Court agreed yesterday to settle a Connecticut land dispute and decide whether governments may seize people’s property for economic development projects, a key question as cash strapped cities seek ways to generate tax revenue.

At issue is the scope of the Fifth Amendment, which allows governments to take private property through eminent domain, provided the owner is given “just compensation” and the land is for “public use.”

Susette Kelo and several other homeowners in a working-class neighborhood in New London, Conn., filed a lawsuit after city officials announced plans to raze their homes to clear the way for a riverfront hotel, health club, and offices. The residents refused to budge, arguing it was an unjustified taking of their property.

They argued the taking would be proper only if it served to revitalize slums or blighted areas dangerous to the public. “I’m not willing to give up what I have just because someone else can generate more taxes here,” said homeowner Matthew Dery, whose family has lived in the Fort Trumbull neighborhood for more than 100 years.

New London contends the condemnations are proper because the development plans serving a “public purpose” – such as boosting economic growth – are valid “public use” projects that outweigh the property rights of the homeowners.

The Connecticut Supreme Court agreed with New London, ruling 4-3 in March that the mere promise of additional tax revenue justified the condemnation.

“While we are disappointed with the Supreme Court’s decision to hear the case, we remain confident the court ultimately will uphold the city’s decision,” said attorney Wesley Horton, who represents New London. “That decision is motivated entirely by concern for the economic welfare of New London and its citizens.”

Nationwide, more than 1,000 properties were threatened or condemned between 1998 and 2002, according to the Institute for Justice, a Washington public interest law firm representing the New London homeowners.

In many cases, according to the group, cities are pushing the limits of their powers to accommodate wealthy developers. Courts, meanwhile, are divided over the extent of city power, with six states saying economic development can justify a taking and nine states allowing seizures only if they eliminate blight. Over the summer, the Michigan Supreme Court restricted the power of local governments to take property for development projects.

In New London, city officials envision replacing a stagnant enclave with commercial development that would attract tourists to the Thames riverfront, complementing an adjoining Pfizer Corp. research center and a proposed Coast Guard museum.

“The record is clear that New London was a city desperate for economic rejuvenation,” the city’s legal filing states, in asking the high court to defer to local governments in deciding what constitutes “public use.”

According to the residents’ filing, the seven states that allow condemnations for private business development alone are Connecticut, Kansas, Maryland, Michigan, Minnesota, New York, and North Dakota. Eight states forbid the use of eminent domain when the economic purpose is not to eliminate blight; they are Arkansas, Florida, Illinois, Kentucky, Maine, Montana, South Carolina, and Washington.