Nagin announced with "great sadness" that he had been unable to find the money to keep the workers on the payroll.
He said only non-essential workers will be laid off and that no firefighters or police will be among those let go.
"I wish I didn't have to do this. I wish we had the money, the resources to keep these people," Nagin said. "The problem we have is we have no revenue streams."
Nagin described the layoffs as "pretty permanent" and said that the city will work with the Federal Emergency Management Agency to notify municipal employees who fled the city in the aftermath of Katrina, which struck about a month ago.
The mayor said the move will save about $5 million to $8 million of the city's monthly payroll of $20 million. The layoffs will take place over the next two weeks.
"We talked to local banks and other financial institutions and we are just not able to put together the financing necessary to continue to maintain City Hall's staffing at its current levels," the mayor said.
Meanwhile, former President Clinton met with dozens of New Orleans-area evacuees staying at a shelter in Baton Rouge's convention center. And officials ended their door-to-door sweep for corpses in Louisiana with the death toll Tuesday at 972 — far fewer than the 10,000 the mayor had feared at one point. Mississippi's Katrina death toll was 221.
A company hired by the state to remove bodies will remain on call if any others are found.
Mr. Clinton, working with former President Bush to raise money for victims, shook hands and chatted with the evacuees, some of whom have been sleeping on cots in the Rivercenter's vast concrete hall for more than a month and complained of lack of showers, clean clothes, privacy and medical care.
"My concern is to listen to you ... and learn the best way to spend this money we've got," said the former president.
Mr. Clinton told New Orleans residents he agrees that displaced workers should get priority for reconstruction jobs. He said the combined problem of bringing back the city's labor force, and providing them housing, is solvable, and he believes workers would return if they were provided temporary housing and jobs connected to rebuilding the city.
Mr. Clinton said federal funds for rebuilding will go through a state plan that he believes should include the housing-training jobs combination.
Robert Warner, 51, of New Orleans said he and others have struggled to get private housing set up through the Federal Emergency Management Agency.
"We've been mired in the bureaucratic red tape since Day One," he said.
During a Rose Garden press conference earlier in the day, President Bush said he takes "all the responsibility for the failures at the federal level."
He says there is "a lot of analysis going on" to learn from the disaster and make any fixes needed.
In his first full news conference since Hurricanes Katrina and Rita hit, Mr. Bush said Congress needs to cut spending elsewhere to pay for recovery. He promised to work with lawmakers to identify areas where spending can be cut.
He says America's heart is "big enough to be generous and responsible" at the same time.
While government action is needed to help rebuild, Mr. Bush says businesses will be the "engine that drives" the recovery. He says policies will be needed to attract private investment to create jobs.
But the president said the nation will continue to spend whatever it takes to support U.S. troops in Iraq.
"They highlighted a problem I've been talking about since I've come to Washington: We need more refining capacity," Mr. Bush said. He highlighted his own heightened awareness by citing a few facts, such as that the U.S. hasn't built a new oil refinery since the 1970s.
"And so I look forward to working with Congress to pass a reasonable law that will allow current refineries to expand and to encourage the construction of new refineries," Mr. Bush said.
Also this week, evangelist Franklin Graham says a sinful New Orleans will be spiritually reborn as a result of Hurricane Katrina.
The son of the Rev. Billy Graham said there was devil worship and sexual perversion in New Orleans before the storm, but now "God is going to use that storm to bring revival" because "God loves sinners."
Graham made his comments at Liberty University in Lynchburg, Va. The comments were reported by The News and Advance of Lynchburg.