As California wrestles with a horrendous budget deficit, the axe hangs over almost every area of state spending, from welfare to education. But there is one activity set for healthy growth: stem cell research.

Dozens of new laboratories are being fitted out and hundreds of scientists recruited. The California Institute of Regenerative Medicine – set up in 2004, when a referendum ap- proved $3bn of state spending on the research – is moving ahead after delays caused by legal challenges and uncertainties over selling the state bonds that will fund it. About $1bn (€700m, £600m) has been committed in research grants and spending on labs and other infrastructure, according to Alan Trounson, CIRM president.

The Golden State provides the most striking example of a growing wave of public spending in the US and globally on stem cells, which many scientists see as the foundation of a new type of medicine in which failing or damaged body tissue will be replaced with fresh young cells. Held back for years by political opposition and lack of funding, stem cell research – which supporters say holds the key to curing diseases ranging from diabetes and heart failure to Parkinson's and spinal injury – is powering ahead.

Ironically, just as the controversial practice has slipped down the news agenda, it has been advancing scientifically at an unprecedented pace. Researchers are finding new ways to make stem cells and turn them into blood, brain, bone and other tissues.

On the political front the arrival of Barack Obama in the White House has changed the regulatory climate, as the new US president fulfils his campaign pledge to relax his predecessor George W. Bush's stringent restrictions on federal funding.

New rules are expected to open the way for the National Institutes of Health, the main US biomedical research agency, to pour hundreds of millions of dollars into stem cell projects – though the regulations may not be as liberal as some research advocates had hoped. “Federal funding for the most advanced embryonic stem cell research remains limited,” says Susan Solomon of the New York Stem Cell Foundation. “This reality makes it a moral imperative that states with funding systems continue to fund the work that the NIH is not able to support.”

New York's $600m scheme is the biggest after California's. There are also bigefforts in Europe and Asia. The world is growing more permissive in the regulation of research involving human embryos, though a few countries maintain severe limitations for ethical or religious reasons.

Funding from the private sector is set to improve, too. While all agree that spectacular cures may still lie decades in the future, pharmaceutical and biotechnology companies believe they are laying the foundations for what could become a huge industry.

Governments have mixed motives for funding stem cell research; the main two are to develop a high-technology economic base and to promote medical progress.

The initiatives that set up the schemes in California and New York were led by high-profile patient advocates. “Our funding in New York focuses on finding cures through science rather than economic development,” says Ms Solomon. “I think the economic development will follow excellent science.”

Even critics of lavish state funding believe it could pay off in the long run by creating a regenerative medicine industry. “A bidding war [for talent] between the states is not a good model for supporting American science because it encourages the balkanisation of research,” says James Thomson of the University of Wisconsin, who first extracted stem cells from human embryos in 1998. “But, having said that, I think California will benefit enormously from the investment.”