General manager Brian Cashman has maintained contact with Pettitte's representatives, Randy and Alan Hendricks, but the hurler rejected a one-year, $10 million offer from the Yankees and could force the club to look elsewhere to round out the starting rotation.
"There's still dialogue going on," Yankees co-chairman Hal Steinbrenner said. "They were not happy with our offer; we were not happy with what they wanted. There's been no agreement."
Cashman would not confirm a New York Times report that New York has pulled its offer to the 36-year-old Pettitte, but said in reference to his level of interest: "Things are more complicated now."
The Hendricks brothers have advised Pettitte not to sign for a sizable difference from the $16 million he earned in each of the past two seasons while pitching for the Yankees.
Meanwhile, New York appears to be drawing the line for what essentially would be its fourth starter. The Yankees have spread $423.5 million among free agents CC Sabathia, A.J. Burnett and Mark Teixeira.
"Anything is possible, all options," Steinbrenner said. "We're just going to continue to look at things. We'll see where we end up in March."
Pettitte was 14-14 with a 4.54 ERA in 33 starts for New York last year, though his second half -- perennially one of his calling cards -- was less than stellar.
He was 2-7 with a 6.23 ERA after July 31, raising questions about his preparation for the season following his inclusion in baseball's Mitchell Report and subsequent testimony in front of a Congressional committee in Washington, D.C.
Pettitte said at the conclusion of the regular season that he wanted to pitch in the new Yankee Stadium, and that if he were to pitch in 2009, it would not be for anybody but the Yankees.
"You look at the ballpark over there, and I would love to do it," Pettitte said then. "I've got some things that I need to weigh over and figure out. Hopefully I can come to a conclusion pretty quick and figure out what I want to do."
Cashman traveled to Houston after the Winter Meetings last month to take Pettitte's temperature, and he confirmed that the Yankees would like to have him back to help complement a rotation that will include Sabathia, Burnett, Chien-Ming Wang and Joba Chamberlain.
"I know what he thinks about us," Cashman said. "It doesn't mean it's going to necessarily translate into something that works for everybody or not. I think the fact that you stay above board and keep dialogue lines open, that's a healthy thing. At the same time, I can't tell you that I'm optimistic about it, either."
Manager Joe Girardi has spoken about what having a New York-proven veteran like Pettitte would do to help the transition of his clubhouse, but the skipper said he has not spoken to Pettitte since Christmas and sounded less optimistic Tuesday than he did in December.
"I have made no bones about my feelings for Andy Pettitte," Girardi said. "Andy has been a great Yankee for a long time. What exactly is going to happen, I can't tell you, but the process continues."
If the Yankees had to fill their rotation from within, Phil Hughes would lead a pack of candidates that could also include Alfredo Aceves, Ian Kennedy, Phil Coke and others. The Yankees have also added veteran Jason Johnson on a Minor League contract to compete for a spot.
"It'll be an open competition," Girardi said.
It is also possible that they could re-engage talks for one of the remaining free agents on the market, like Derek Lowe or Oliver Perez.
"I think it's a rare time for a lot of clubs to have a free-agent market like this," agent Scott Boras said. "The depth of high-end talent in it, you can say there are No. 1 and 2 pitchers that are available, or 26- and 27-year-old pitchers who have great upside."
But those who have spoken to Pettitte, including Girardi and captain Derek Jeter, insist that he is amenable to a return. Cashman seems less certain, but there is still some time to work on final touches.
"I care a great deal about the guy and what he's meant here," Cashman said. "Ultimately, Spring Training is not upon us. The fifth starter is going to come, at this point, from one of those kids. If that changes, the best way to leave it is that we'll certainly let you know."
Bryan Hoch is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.