Speculation is rampant that Atlantic City Mayor Robert Levy will re-emerge from hiding and resign this week over allegations he lied about his military service and illegally collected veterans' benefits.

The lawyer who has been retained to advise City Council President William Marsh — the second-highest elected official in the gambling mecca next to Levy — told FOXNews.com that the mayor will likely resign Tuesday or Wednesday. A city official who asked not to be identified echoed those sentiments.

"In all likelihood, it looks like the mayor is going to resign this week. My client will be acting mayor, and then there will be heavy-duty litigation" over who should run the city, said Marsh's attorney James J. Leonard Jr.

Leonard said Marsh is the one who should succeed Levy as acting mayor, rather than the business administrator who has assumed that role, Domenic Cappella, on the claim that Levy asked him personally to take over his job duties.

Though he wasn't sure when Levy would make the official announcement, Leonard said he's been hearing it could happen Tuesday or Wednesday. Levy will likely be forced to resign as mayor; will be prohibited from running for public office again; could receive probation rather than jail time; and could lose some of his pension benefits, according to Leonard.

"There does not appear to be any scenario in which Bob Levy will return as mayor," the attorney said. "Even though it hasn’t happened yet, it’s over."

But state Sen. James Sonny McCullough said he has been given no indication that Levy will quit.

Levy called in sick to work a week and half ago and has since disappeared. With his resignation, "this circus will come to an end," the city official said.

Levy is rumored to have been staying at a psychiatric treatment facility in Burlington County, N.J., since he suddenly vanished, though that could not immediately be confirmed.

The strange case of the missing mayor began when information was revealed suggesting Levy lied about his military service in the U.S. Special Forces and has been falsely collecting military benefits.

The official said a federal investigation is close to concluding that Levy illegally took military benefits he wasn't entitled to receive, and a plea deal is being worked out with prosecutors.

The Press of Atlantic City was first to check out Levy's accounts that he was a 20-year Army veteran with two Bronze stars and two tours of duties in Vietnam. The newspaper learned that Levy lied when he said he was a Green Beret and used the false claim to bump up his veterans' benefits payments by about $25,000.

Click here to read the latest Press of Atlantic City article on Mayor Levy.

The allegedly phony Special Forces soldier has said he should have corrected the record years ago.

"Just something that occurred, you know ... just something that occurred and I am sorry for having it done," Levy told reporters recently.

But on Sept. 26, Levy got into his city-issued Dodge Durango and drove off. A Levy spokesman issued a statement saying the mayor was going on indefinite medical leave, and an aide said he was in the hospital but few people seem to know where or for how long he has been seeking medical care.

The reason behind the hideout may be because Levy's lawyer, who would be the one to help orchestrate his resignation, has been out of the country and is expected to return Monday.

McCullough, a Republican state senator from nearby Egg Harbor Township, said he has not heard back from the mayor's wife, Hazel, about any plans for Levy to resign, and Cappella, the acting mayor, has said they have not heard anything definitive about a departure.

Sources within the city's Democratic Party said Chairman Ron Ruff is preparing to submit three names of people who could possibly replace the mayor and is hoping to get a letter of resignation soon.

City Councilman Bruce Ward asked a judge on Friday to declare the mayor's seat officially vacant so that the council can name a replacement.

Gov. Jon Corzine has said the state is looking into legal options. City officials say that the day Levy disappeared, he signed an order transferring his powers to Cappella.

"He doesn't have to give it to you in writing; it can be verbal. I have had conversation with him last Wednesday where I wanted to find out how he was doing. He told me to continue the day-to-day business, that he would be back soon, and do what I do every day," Cappella said.

Unfortunately, Atlantic City residents are no strangers to this kind of controversy. Over the past 40 years, five Atlantic City mayors have been convicted of a variety of criminal offenses, four of the city's last eight mayors have been investigated for corruption and three City Council members are either in jail or under house arrest.

FOX News' Catherine Donaldson-Evans, Laura Ingle and Kathleen Wells contributed to this report.