Sources close to the situation, however, insisted Saturday night that no deal is imminent and that both teams continue to talk to other clubs.
McGrady was in the nation's capital Saturday to attend the Georgetown-Duke game at the Verizon Center, but that appears to be unrelated to any Houston-Washington talks.
The game was a benefit for educational programs in Darfur and also commanded the presence of President Obama. McGrady is one of the NBA's leading Darfur activists, having filmed a documentary there in 2007.
McGrady was granted an indefinite leave from the Rockets in December after McGrady's representatives and Houston management mutually agreed to pursue a trade that would find a new home for him before the league's Feb. 18 trading deadline.
Sources told ESPN.com that the Rockets have indeed expressed an interest in Wizards forward Caron Butler and center Brendan Haywood. But for a Wizards-Rockets deal to go through, Washington would almost certainly try to hold out for at least one of Houston's rotation players, such as Luis Scola, in addition to McGrady.
The Rockets, though, are determined to keep the core of a roster that has unexpectedly managed this season without McGrady and the injured Yao Ming. Houston is thus believed to be offering Washington only the payroll relief that would come with McGrady's contract.
The Rockets, sources say, have made it clear that they are willing to surrender McGrady's $22.5 million contract before the deadline if they can get quality talent in return, but they also have the option of simply keeping McGrady for the rest of the season and letting his contract expire to gain payroll flexibility for an offseason retooling.
Washington, meanwhile, is expected to remain active leading up to the deadline even if nothing further materializes from its talks with Houston. The Wizards are widely expected to commission a thorough housecleaning in the wake of the Gilbert Arenas/Javaris Crittenton gun incident, which ranks as the obvious low point of a disastrous and chaotic season.
Butler, Haywood and Wizards mainstay Antawn Jamison have all popped up regularly in trade speculation this season, even before the Dec. 21 confrontation in the Wizards' locker room that led to Arenas and Crittenton receiving season-long suspensions this week from NBA commissioner David Stern.
Marc Stein is a senior NBA writer for ESPN.com.