JACKSON, Mississippi (Reuters) - Mississippi on Friday became the first state to have its proposal for a health insurance exchange rejected by the U.S. government, and federal officials said Republican Governor Phil Bryant's opposition to the plan was to blame. But he has argued that a state-based system would let Mississippi control its own insurance market, saving thousands of jobs and millions of dollars in the long run. Chaney said he felt "betrayed" upon getting first word of the rejection on Thursday and blamed the decision on politics versus the merits of his proposal, according to local media. After receiving the denial letter on Friday, the insurance commissioner said he would continue to work with the federal government to build a state-operated exchange independent of any federal program. "This would be a free-market approach to solving some of the state's insurance problems faced by small businesses," Chaney said in a statement. The commissioner has been working on the exchange for more than a year and became a resource for other states trying to devise their own plans. An exchange allows consumers to compare plans provided by healthcare providers in an effort to make them more transparent and get more people enrolled. The federal government is likely to end up operating exchanges in the states that have not applied to run their own. States that don't run their own exchanges would opt for one of two alternatives: a federally facilitated exchange that requires minimal state participation, or a federal partnership exchange in which states help by performing certain duties. Editing by Colleen Jenkins, Alden Bentley and Eric Beech