Pavano has been formally approached about accepting a Minor League contract and coming off the Yankees' 40-man roster, as they need to clear space for other players.
"Right now, we're just having preliminary conversations," Pavano's agent, Tom O'Connell, told the AP on Tuesday. "Carl is contemplating possibly accepting a Minor League contract if they choose to release him. At this point, neither the Yankees or Carl have come to any decisions."
Pavano, a 31-year-old right-hander, delivered just 19 starts over the first three years of a four-year, $39.95 million agreement and is part of the reason the club has refocused on developing premier pitching talent from within.
The Yankees' Opening Day starter this year by default when both Chien-Ming Wang and Andy Pettitte were slowed by injuries, Pavano pitched just twice before suffering arm trouble after an April 9 start at Minnesota.
He underwent Tommy John surgery on June 5 and is not expected to be ready to pitch at the Major League level until July at the earliest. Since joining the Yankees before the 2005 season, the team's investment in Pavano has yielded just a 5-6 record.
By accepting the Minor League assignment, it is believed that Pavano would satisfy certain insurance requirements demanded upon the $12.95 million remaining on his deal -- $11 million next year and a $1.95 million buyout of his 2009 option.
O'Connell said a Minor League deal could be harmful.
"You're giving up your Major League rights under the collective bargaining agreement if you sign a Minor League contract," he said. "There's a lot of advantages from being on a Major League roster as opposed to being on a Minor League roster."
Pavano would be able to help the Yankees clear spots on their 40-man roster for players like Alex Rodriguez, Mariano Rivera and LaTroy Hawkins.
All of those players have reached agreements with the club on new contracts that have not yet been officially announced, partly because the team's roster has been full for weeks.
In order to finalize agreements with backup catcher Jose Molina and left-hander Andy Pettitte, the Yankees designated both first baseman Andy Phillips and outfielder Bronson Sardinha for assignment.
Phillips elected to become a free agent, while the Yankees still have days remaining to trade, release or reassign Sardinha to the Minor Leagues.
Bryan Hoch is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.