As Formula One cars roar around Monaco's historic street circuit today, observers will notice something different about the glittering coastline of the gamblers' paradise. The 11-storey art deco-style Monte Carlo Bay Hotel and Resort is a €200m (£140m) development and the first new hotel built by the state for 75 years.

As Formula One cars roar around Monaco's historic street circuit today, observers will notice something different about the glittering coastline of the gamblers' paradise. The 11-storey art deco-style Monte Carlo Bay Hotel and Resort is a €200m (£140m) development and the first new hotel built by the state for 75 years.

Monaco has had to improve what it offers to tourists in the face of competition from other European resorts gifted with gambling deregulation. But with every inch of the tiny principality already crammed with condominiums, casinos and banks, Bernard Lambert, chief executive of the state-controlled leisure conglomerate Société des Bains de Mer (SBM), had to come up with a fresh angle.

The new, family-friendly four-star hotel is built on 10 acres of land reclaimed from the Mediterranean and marks a new direction as Monaco tries to tempt more tourists to its gambling tables. And SBM will also be changing direction geographically, for over the next three years Lambert plans to buy hotels in European cities, with London at the top of his shopping list.

Monaco measures less than a square mile and has fewer than 32,000 residents, but it packs a mighty punch. Ever since Europe's first casino opened there in 1863, the principality has self-consciously nurtured its reputation as a playground for the rich and famous.

Inspired by the reputation of his well-heeled casino customers, Monaco's late ruler, Prince Rainier, developed a luxury tourism industry and laid the foundations of an offshore banking sector, with laws guaranteeing anonymity for account holders. The principality's 45 banks now provide around 13 per cent of Monaco's massive €9.2bn GDP, while gambling revenues represent only 4.4 per cent and tourism brings in over 25 per cent.

Founded over 150 years ago, SBM has a monopoly concession to run Monaco's casinos until 2027. It also owns an 18-hole golf course, opera house, tennis club, five luxury hotels including the classic Hôtel de Paris and Hermitage, 23 restaurants (with seven Michelin stars between them) and several nightclubs, including Jimmy'z, where a glass of water costs over £25.

SBM is 69 per cent owned by the ruling Grimaldi family, with the remainder quoted on the Paris bourse. Last year, it made an €8.3m profit on revenues of €318m - of which, says Lambert, "two thirds comes from casinos and one third from hotels. We are looking to get 50-50."

In Monaco, the 334-room Monte Carlo Bay Resort drips with glitzy touches, such as a casino with 150 next-generation fruit machines, Europe's first sand-bottomed swimming lagoon and a fountain choreographed to classical music. Lambert expects to get 80 per cent occupancy after six months - a bold boast given that SBM's other properties currently average only 65 per cent. But crucial to the new hotel's success is its low average room rate of €250.

"The Bay Resort was positioned as four star because we need to be more accessible in terms of rates and convention business. Also, there was a need for a hotel for families," says Lambert. He adds: "The hotel has unique facilities and we know that this is exactly what the Italian market likes."

Italy and France each provide around 16 per cent of SBM's guests, with the greatest proportion, 19 per cent, coming from the UK. But SBM's biggest black mark is the American market, which brought in around two fifths of turnover and a quarter of visitors before 9/11 and the war in Iraq. This business has been cut in half as more Americans prefer to place their chips in Las Vegas instead of Monaco.

Lambert was hired as this problem peaked. A graduate of the renowned Nice Hotel School, he spent 28 years at Le Meridien, working his way up from being general manager of Le Meridien Boston to chief executive of the company. Lambert took the helm at SBM in 2002 after it posted a €13m loss.

In a bid to woo the dollar, the Hermitage has had a €30m facelift, the opera house has had two floors added and the port has been given a €260m extension to accommodate larger yachts. Even the Grand Prix circuit has had €20m poured into it. But all the time, Americans have proved reluctant to bite.

To counter the financial effect, Lambert took a punt two years ago by paying €40m for a 3.6 per cent stake in Wynn Resorts, the US gaming company which last month opened Wynn Las Vegas, the world's biggest casino-hotel. With another on the way in Macau and a tender for Singapore, Wynn is a hot Nasdaq stock. Since Lambert signed the deal, SBM's shares have more than doubled to an all-time high of €479, giving it a market capitalisation of €575m. And although the deal included cross-marketing initiatives between the two companies, Lambert stresses that "the alliance is in capital in one way only. Wynn has not invested in SBM and does not intend to develop anything in Monaco."

Lambert is also taking a punt on the liberalisation of gaming laws in Britain, through an agreement with London Clubs International. "The link with LCI is a marketing alliance because there is major movement in the UK and possibly deregulation," he says, adding: "Within the next three years, we are looking to add properties in Europe to our portfolio."

In London he would like something trendy, with a bar-brasserie. "If you want to be in town, it is difficult to find new builds, so it will be an old name."

Back at home, SBM has a battle on its hands. In response to the new hotel, Monaco's independent hoteliers are raising their own game.

In January, Le Meridien Beach Plaza opened its doors after a £12.2m hi-tech renovation in which two glass towers were erected on the sides of the hotel. Meanwhile, the 619-room Fairmont, the largest hotel on the French Riviera and recently acquired by the Saudi billionaire Prince Alwaleed bin Talal, is about to get a $50m (£27m) upgrade. The Metropole, considered the top hotel in the 1940s, has undergone a similar process and added a spa. Even the Columbus, Monaco's trendiest hotel, is renovating by adding a penthouse.

More than 300,000 tourists visit Monaco every year but it currently has a tiny total of 1,600 hotel rooms. Xavier Rugeroni, general manager of Le Meridien, says: "There is competition between the hotels in Monaco but it is to benefit the destination."

But with SBM's new hotel taking bookings, the odds are a little more in its favour. So Lambert can mull his next move and place even bigger bets abroad.