The left-handed starter has rejected the Yankees' one-year, $10 million offer, The New York Times reported, citing a person with knowledge of the negotiations.
The door does not appear closed on Pettitte returning to New York.
However, "Things are more complicated now," Yankees GM Brian Cashman said Tuesday, without clarifying exactly what was more complicated, according to the New York Daily News.
"The best way to characterize it is that he hasn't accepted anything we've proposed and we haven't accepted anything they've proposed," Cashman said, according to the report. "I talked to the Hendricks brothers [Pettitte's agents, Randy and Alan Hendricks, on Monday]. If spring training started today, we're going with the kids."
Yankees co-chairman Hal Steinbrenner echoed Cashman's assessment.
"They were not happy with our offer; we were not happy with what they wanted," Steinbrenner said, according to the report. "There's still dialogue going on. Anything is possible, all options. We're just going to continue to look at things. We'll see where we end up in March."
Last month, Pettitte told The Times that he wanted to return to the Yankees but was leaving the matter to his agents.
Randy Hendricks did not respond to an e-mail message on Monday, The Times reported.
There's also the issue of money.
The $10 million offer Pettitte reportedly rejected would represent a $6 million decrease from the $16 million the Yankees paid Pettitte last year. And that comes at the same time the team has pledged $180 million to first baseman Mark Teixeira and a combined $243.5 million for starting pitchers CC Sabathia and A.J. Burnett.
There's also the question of what direction the Yankees want to go in with their pitching staff. The Daily News reported that according to baseball sources, there is a difference of opinion within the Yankees on whether to bring Pettitte back as a No. 4 or 5 starter, or let young pitchers such as Phil Hughes and Alfredo Aceves compete for spots at the back of the rotation.
Pettitte went 14-14 with a 4.54 ERA last season, after starting the year at the center of baseball's performance-enhancing drugs scandal.
Pettitte, 36, waited until early December 2007 to tell the Yankees he would pitch in 2008. That was before the release of the Mitchell report, which included Pettitte, and he had not told the Yankees he might be included in the report, which said he had used human growth hormone. He subsequently admitted using HGH and was supported publicly by the Yankees.