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.

Healy wrote in the report that the outlook for next fiscal year is "no better," noting that lack of state funding would lead to an estimated $3.4 million in the hospital's budgeted deficit.

"While the city is actively lobbying at the state level to gain support for the restoration of these funds, I am not optimistic about our chances for success," Healy wrote.

`Committee on Cats and Dogs'

Steven M. Wise, a member of the mayor's blue ribbon committee on the treatment of animals in Cambridge laboratories, and Gul Agha, founder of the Cambridge Committee for Responsible Research, submitted proposed ordinances to regulate animal care and use in laboratories to the council for consideration.

The Blue ribbon committee originally presented its report to the council at the February 27 meeting. Councillors commended them for their hard work but asked if the committee would continue to meet in order to draft specific suggestions for the council.

The council also held a hearing to discussing licensing of Cambridge taxicabs and the distinction between cabs and livery services. Walsh introduced a resolution asking the city manager to direct Chief of Police Anthony Paolillo to review why Boston taxis are picking up fares in Cambridge.

Walsh's order calls on the police chief to prepare a report "to detail on what is being done to curtail this practice and what plan he can enact to crack down and bring to an end this violation."

In other business, the Cambridge Citizens for Liveable Neighborhoods filed a petition with the council that would restrict the number and type of zoning variances granted Cambridge.

The petition asks for a new subsection to the Zoning Ordinance that would not permit variances to be issued in all residence and open space districts. If adopted, the change would make it more difficult for commerical establishments to be set up in residential areas.