Walsh is expected to sign a three-year, $15 million contract with New York at the end of this season to oversee their basketball operations division. The source did not know what would become of current Knicks president of basketball operations and head coach Isiah Thomas once Walsh joined the Knicks.
Walsh only said Monday he will finish the season with Indiana and will not comment on his plans. Pacers team president Larry Bird will take over many of Walsh's duties.
Pacers spokesman David Benner said Tuesday that Walsh has said he has no deal in place with any team.
"I'm completing what was my dream job," the 67-year-old Walsh said at a news conference on Monday afternoon announcing his departure from the Pacers. "I have loved every single moment of this job, including the last few years when things have been more difficult."
It was reported last week that Walsh had discussions with the Knicks about possibly replacing Thomas as team president.
"As far as what I'm going to do, I'm not sure," Walsh said. "As a result, I'm not going to comment on it until I have a better idea."
Late Monday, Knicks spokesman Jonathan Supranowitz told The Associated Press that the team would not comment on a deal between the Knicks and Walsh.
Walsh's agent, Steve Kaufman, said he would not comment on his client's employment status until after the NBA season.
In New York, Thomas wouldn't comment on speculation that Walsh could replace him, but he praised his former boss with the Pacers.
"He's had a great career, he's one of the best who's ever done it," Thomas said before the Knicks lost to New Jersey to fall to 19-51 on the season. "I wish him great success and he's someone that I respect tremendously. He gave me my first coaching job and I truly do like him as a person and he's done a lot for the game."
Walsh said Monday at team headquarters the time is right to go and he has enjoyed his 24 years with the club. That includes the past few years, when the team has dealt with a series of legal problems involving players.
Walsh said the announcement should not come as a surprise, since he has said previously this would be his last season.
Walsh, who joined the Pacers as an assistant coach in 1984, became general manager in 1986 and president two years later. He hired Bird as coach in 1997, and after Bird moved into the front office three years later, Walsh groomed him as his eventual successor.
As president of basketball operations, Bird has shared many of the day-to-day operations with Walsh in recent years, a division of authority that has often led to confusion in dealing with other teams, Walsh said.
"My real reason is, I think I've been here too long," he said. "It's not healthy for the franchise.
"I started thinking that the last two or three years. But you also want to see things get better," he said.
Earlier this month, Pacers co-owner Herb Simon made it clear that there would be some sort of upheaval within the organization by season's end, saying "everything but the owner" would be addressed.
The Pacers reached the Eastern Conference finals six times and won the Central Division four times under Walsh. They made the NBA Finals in 2000, when they lost to the Los Angeles Lakers, and had the league's best record in 2004 before the franchise began unraveling.
"It was a joy to spend time in Indiana under his leadership. Great man and a great basketball mind," said Mark Jackson, who played on the Pacers' finals team. "Sad to see, being a member of the Pacers and knowing what he means to that organization and that community, but at the same time I wish him nothing but the very best because like I said, he's a great man and a great basketball mind. He's the best in the business."
Starting with the brawl involving Indiana players and Detroit Pistons fans, the past three seasons have been littered with losing records, personnel changes and off-court issues that have damaged the team's once-shiny reputation.
Former Pacer Stephen Jackson pleaded guilty to criminal recklessness for firing gunshots in the air during a 2006 fight at a strip club; this year, Pacers guard Jamaal Tinsley and several companions were targeted in a shooting that wounded the team's equipment manager outside a downtown hotel. And Tinsley and Marquis Daniels recently cut a deal with prosecutors to avoid trial on charges in a separate fight at a nightclub.
Recently, a murder suspect was arrested after he had been at the home of Pacers forward Shawne Williams and a rape was reported at another player's home. Neither player was charged.
This season, Indiana has the NBA's worst attendance, and despite a current four-game winning streak, the Pacers (29-41) are still a game and a half behind Atlanta for the eighth and final Eastern Conference playoff spot.
"Everyone was getting confused," Simon said of the reason for announcing Walsh's decision now, rather than the end of the season. "There were lots of rumors. Once I was convinced Donnie was really leaving, I thought it was best to let everyone else know."
Walsh mentioned the possibility of retirement several times last season, when the Pacers went 35-47 and missed the playoffs for the first time in a decade.
"I really don't think this should come as a surprise," he said. "I said this would be my last year, and now I'm completing what has been my dream job."
And now it's Bird's.
"Now it's one voice; it's mine," Bird said. "Pressure is pressure. I've dealt with it in the past, and I'm looking forward to it."
Information from Andrew Marchand of 1050 ESPN Radio in New York and The Associated Press was used in this report.