In attempt to collect $7.25 million owed to the Cambridge Hospital by the Commonwealth of Massachusetts, the City Council voted last night to take legal action against the state if Gov. Michael S. Dukakis does not respond to an invitation to discuss the issue.

If Dukakis does not set up a meeting by May 1, the city will file a lawsuit against the commonwealth, according to an order passed last night.

In a budget proposal presented last week to the council, City Manager Robert W. Healy described the bleak outlook for Cambridge Hospital, saying that if legislation pending at the state and federal levels were passed, the city would probably have to raise taxes to cover costs.

Hospitals throughout Massachusetts face a loss of more than $500 million in state funds because of the current state budget crisis, according to the budget proposal. Medicare payments for the state will be reduced by more than $100 million in the proposed federal budget, the plan also says.

"The Cambridge Hospital is impacted by these revenue cuts to a greater extent than most hospitals due to a disproportionately higher number of Medicaid and uninsured patients," Healy wrote in the plan.

"If the state and federal cuts are approved, a significant increase in the tax support of the hospital will be required to maintain the hospital's increasingly vital role in the community," he added.

Councillors said they hope to alleviate the hospital's growing deficit by collecting the money from the state rather than by raising taxes.

"This is really a wrongdoing by the governor of the state, made even worse because it's the hospital," said Councillor William H. Walsh, who drafted the resolution.

The proposed budget for the next fiscal year looks equally bleak, and the city manager estimated in his proposal that the Cambridge Hospital deficit will reach $11 million by the end of fiscal year 1990.

The charges collected by the hospital are the third largest source of revenue for the city, Healy reported. With the tremendous deficit incurred by the hospital, one of every 10 dollars raised in property taxes is currently devoted to the hospital, he wrote in the report.

Walsh's proposal initially suggested withholding the city's payment of more than $5.8 million to the state for the Cherry Sheet Assessments--which include payments for the Massacusetts Bay Transit Authority, air pollution control and county taxes--until the state pays the money it owes the hospital.

"I'm not going over [to the State House] just to shake [Dukakis'] hand," said Walsh. "I'll tell him, `We're not going to pay you unless you pay us.'"

The city does not pay money for the Cherry Sheet Assessments directly to the state, however, Healy said. Instead, the state subtracts the amount Cambridge owes to the state from the money it pays the city.

Because the council cannot control the payments to the state, councillors amended the proposal to include the invitation to Dukakis.

The state owes Cambridge City Hospital $3 million in reimbursements and compensation for its free care pool provided in fiscal 1987 and 1988. The commonwealth also owes the hospital $2.5 for unpaid fiscal 1989 Medicaid, and current year payments for uncompensated care are expected to lead to an additional $1.7 million owed by the state, the plan states.