“Madison Square Garden has decided to move forward with our renovation, previously announced in 2004. After exploring several alternatives, it has become clear that the only viable option is a renovation,” a spokesman for Madison Square Garden, Barry Watkins, said in a statement.

The Garden’s announcement comes as the state recently lost the two top people leading the project: Governor Spitzer and his deputy for development, Patrick Foye. Governor Paterson expressed support for the project, but has seemed rather preoccupied with hammering out a budget by March 31.

With the gap in leadership on the project, people close to the development effort questioned whether the Garden was taking the opportunity to jockey for a better negotiating position. A renovation would cost hundreds of millions for the Garden, while the developers of the Penn Station project, Vornado Realty Trust and the Related Companies, are presumably offering the firm an enticing deal to move into a brand new arena.

Mr. Watkins said in his statement that the Garden, controlled by the Dolan family, intends to release more details soon.

The announcement came hours after Senator Schumer called for the Port Authority to take over the project, and Governor Paterson issued a statement saying that he was considering the suggestion.

The plans for the grand station, named Moynihan Station, were dependent on a move by Madison Square Garden to the Ninth Avenue end of the Farley Post Office site, clearing the way for the station to undergo a complete makeover that would allow natural light to reach the remade concourses below. Without the Garden moving, such a major redo would be impossible, officials have said.

The Garden has expressed doubts on the ability of the Moynihan plans to ever reach fruition, given the major complexities involved in the project, which also involved a new train hall in the Farley building for New Jersey transit. The company has indicated it is anxious to shed its tag of having the second-oldest arena in the NBA.

Governor Spitzer got personally involved in the effort in an attempt to save the project, and many participants were optimistic his presence and interest would lift the deal off the drawing boards. With a tangle of city, state, and federal agencies, though, the complex plan never moved to the point where funding had been secured, sources outlined. Before Mr. Spitzer left office, the state had been looking to the federal government for more than $800 million, a rather large sum (though Senator Schumer, key to the funding, is said to have better relations with Governor Paterson than with Mr. Spitzer). The redo of Penn Station was likely to cost well over $2 billion, with another $900 million or so already set aside for the Farley component of the plan.

Given that it already received most of the needed funding and Related and Vornado are in a contract to complete it, the Farley portion of the project could conceivably be a fallback plan should the Garden stay in its current spot.

According to one person close to the project, the Garden would need approvals to renovate its facility, including one that goes through the city’s land-use approval process, which the mayor or City Council could block.

In statements, the developers and the city expressed hope that the Moynihan plan was still alive.

“While we understand the frustrations of Madison Square Garden after three lengthy years of pursuing this grand but complex plan, we have every faith that our city, state and federal leadership will enable this project to become a reality for all New Yorkers,” said Vishaan Chakrabarti, the project manager for Vornado and Related.

Council Speaker Christine Quinn offered a statement that took a shot at the Garden, saying the announcement “demonstrates a callous disregard for both the future of the Moynihan Station project and the future of New York City, as well as disrespect for the legacy of Senator Moynihan.”

We'll post a response from the state, the lead on the project, when we get it.

Note: This article was updated from an earlier version, with new reporting.