Plans to move Madison Square Garden across the street into the new Moynihan Station could fall through if City Hall holds firm on a plan to tax “the world’s most famous arena.”

The Garden has enjoyed a property tax exemption worth about $10 million since 1982, when the arena’s owners threatened to leave the city. Garden officials have indicated that they would not move off their current site unless they were able to take their tax break with them.

Mayor Bloomberg has called for state lawmakers to revoke the deal since last year, when the arena’s owners, Cablevision, played a lead role in blocking a football stadium over the West Side railyards.

Yesterday, the deputy mayor for economic development, Daniel Doctoroff, declared that the “tax exemptions will not travel” across the street.

State officials say they hope that construction on Moynihan Station will begin this year. A public hearing on the matter is set for today, and final state approval is expected next month.

City officials have been eager for the Garden to move into the rear of the Farley Post office, which is scheduled to become a train station named after a late senator, Daniel Patrick Moynihan. The move would free up 5 million square feet of space where the Garden currently exists between Seventh and Eighth avenues.

Two of the city’s biggest developers want to renovate the existing Penn Station and build a sprawling residential and commercial complex that would generate tens of millions of dollars a year in tax revenues for the city.

The developers, the Related Companies and Vornado Realty Trust, which were selected by the state last year to undertake the $880 million plan to transform the Farley Post Office building into Moynihan Station, met recently with Mr. Bloomberg to discuss their ambitious plan.

Mr. Doctoroff said yesterday that the “enormous transaction” proposed by the developers “is a very – potentially – beneficial project for the city.”

Despite the public spat over the mayor’s plans for a West Side Stadium last year – and indications from insiders that the mayor still holds a grudge – Mr. Doctoroff said the city would “put aside what has happen in the past to do the right thing.”

“Obviously we feel that in that case MSG did not act in the interest of the city.The past is the past and it is time to look to the future,” Mr. Doctoroff said.

A spokesman for Madison Square Garden, Barry Watkins, would only say that the Garden would continue to explore different possibilities to move or renovate. A spokesman representing Related and Vornado, Howard Rubenstein, declined to comment about tax abatement issues related to the plan.

In a sense, the Garden holds the most valuable cards in this negotiation – by occupying most of two city blocks running between 33rd and 31st streets between Seventh and Eighth avenues. By vacating the site, the Garden would clear the way for a much-needed renovation of Penn Station and also unlock enormously valuable air rights over the site.

Mr. Doctoroff would not speculate how much the current Garden site would generate annually in payments in lieu of taxes if there were a mix of commercial and residential towers. Considering its prime Midtown location, it is clearly worth tens of millions of dollars a year for the city.

The tax proceeds from a Garden move could be critical to the mayor’s vision for development of the far West Side. The current Garden site and the planned Moynihan Station are included in the Hudson Yards District, which means that property taxes generated by development there would not go into the city’s general fund, but would pay for infrastructure improvements designed to spur development of the far West Side, such as the extension of the Subway 7 line, and a platform over the eastern end of the MTA’s rail yards.

The city is planning to issue $3 billion in bonds to fund those projects this summer. According to the current plan for the far West Side which was approved by the City Council last year, the city will pay for the debt on those bonds until the Hudson Yards area develops and generates enough tax revenue to pay off the bonds. That is expected to take at least a decade. In the mayor’s proposed 2007 budget, about $146 million is penciled in to pay debt service on the Hudson Yards bonds.

Mr. Doctoroff denied that clearing the Garden site would necessarily help to fund the city’s West Side plans. He said that if the Garden project materialized, the eastern side of the Hudson Yards area would probably be developed first, ahead of dense development slated for Eleventh Avenue.

“Whatever you build on this site, to some extent will compete with other development that could occur further to the west,” Mr. Doctoroff said.

“Having a truly modern and bold gateway to the West Side can’t help but help” the plans, he added.

There are many unanswered questions about the potential Garden move, including who will pay for the ambitious renovation of Penn Station proposed by the developers.

State officials said they have not been fully briefed on the developers’ plans, an awkward omission considering the state is leading the Moynihan project.

Similarly, the leaders of several city groups are outraged that today’s public hearing will not address the development issues raised by moving the Garden into Moynihan Station.

The president of the Municipal Art Society, Kent Barwick, said he will demand that public officials “put their cards on the table” and provide more information about the Garden move at today’s hearing.

“The plan they are having the hearing on, everyone knows it’s not the real plan,” Mr. Barwick said.

Preservationists are worried that moving the Garden into the western half of Moynihan Station will take away from the landmarked front half of the Farley Post Office building. The president of the New York Landmarks Conservancy, Peg Breen, questioned why the Garden cannot move into another nearby site.

“It’s another massive development deal instead of a great public space and public purpose,” Ms. Breen said.

Still, several urban planners and real estate experts raved about the possibility of improving Penn Station, the cramped, underground labyrinth that is the busiest station in America.

“Dynamite Madison Square Garden. Start all over again,” said the director of Friends of Moynihan Station, Maura Moynihan, the daughter of the late Senator Patrick Moynihan, the first champion of the project.

The president of the Real Estate Board of New York, Steven Spinola, called the Garden plans “phenomenal” and said it would spare Moynihan Station from being an “antique” by giving it a use and the steady traffic from Garden events.

As for development of the Garden site, Mr. Spinola said that it would be the “next natural step” after Lower Manhattan. With a completion date of around 2014 or 2015, Mr. Spinola said that the new office space would not compete with more than 8 million square feet of commercial space planned for ground zero, which is expected to come online in 2012.