"After exploring several alternatives, it has become clear that the only viable option is a renovation," MSG spokesman Barry Watkins said in a statement.
The arena, on Manhattan's West Side, had been negotiating for months with city, state and federal officials to move into the James A. Farley Post Office, allowing developers to tear down the arena and renovate the dark maze of tunnels and train tracks that run underground.
But the project stalled when enough funding never materialized; the state official overseeing the project, Patrick Foye, left his job this month after former Gov. Eliot Spitzer resigned.
State officials didn't immediately comment Thursday.
MSG, owned by Cablevision Systems Corp., one of the nation's top telecommunications and entertainment companies, would need state and city permission to move ahead with its renovation.
City Council Speaker Christine Quinn said MSG's decision shows "a callous disregard" for the future of the West Side.
"It really takes a project and puts it into some level of chaos," she said.
A spokesman for Mayor Michael Bloomberg, as well as the private development venture that planned to rebuild the station and create new office space and shops, reiterated a commitment to completing the train station and developing the surrounding area.
"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, president of Moynihan Station Venture, a joint venture of The Related Cos. and Vornado Realty Trust.
The city has feuded publicly with Cablevision before, when Bloomberg sought permission to build a new stadium for the New York Jets on the West Side and Cablevision lobbied to torpedo it.
The new train station is to be named after the late U.S. Sen. Daniel Patrick Moynihan, who sought more than a decade ago to create an atrium like Grand Central Terminal's in the landmark post office.
Preservationists had expressed concern that the Garden, which would share space in the post office building, would overwhelm the train station with a planned glass wall facing the concourse or drape billboards over the building's Corinthian columns.
MSG said in its statement that it supported development on the West Side and praised Sen. Charles Schumer. The senator earlier Thursday proposed having the bistate Port Authority of New York and New Jersey oversee the renovation, which drew statements of support from Gov. David Paterson and Port Authority officials.
Schumer's office declined further comment after MSG's announcement.
