In an interview with MLB.com, Mussina said the deal should be done by next week.
"I would say it should be done within a week; at least, I would hope so," Mussina told MLB.com. "We're that close to having it finished, but I haven't signed anything yet."
Mussina's $17 million option for 2006 was declined Wednesday by the Yankees. The 38-year-old right-hander gets a $1.5 million buyout.
His agent, Arn
Tellem, described talks this week as being "in the red zone."
In the final season of an $88.5 million, six-year deal, Mussina went 15-7 with a 3.51 ERA in 32 starts this year.
"I'm really happy that he's going to be back," Yankees catcher Jorge Posada said at Alex Rodriguez's charity poker tournament in New York. "He's a perfectionist. He's a professional. And you understand, every time he goes out there, you understand that you have a chance to win. He prepares and he's ready. So I'm really happy."
A 16-year veteran, Mussina has a career 239-134 record with a 3.63 ERA and 2,572 strikeouts for the Yankees and Baltimore Orioles. He is a five-time All Star.
The Yankees, who lost out to the rival Boston Red Sox in the bidding for the right to deal with Japanese right-hander Daisuke Matsuzaka, are in the midst of remaking their pitching staff.
In the past week they have dealt Jaret Wright to the Orioles for right-handed releiver Chris Britton -- agreeing to pay $4 million of Wright's $7 million salary in the bargain -- and sent disgruntled outfielder Gary Sheffield to the Detroit Tigers for three pitching prospects.
Information from The Associated Press was used in this report.