The Metropolitan Transportation Authority has selected Tishman Speyer to re-create the 26 acres that constitute the Hudson Rail Yards project on Manhattan’s West Side. The decision ends an eight-month bidding process, but the chosen developer must contend with a sinking economy, rising construction costs, and the prospect of a drawn out fight with the City Council.

With a winning bid valued at $1.004 billion, Tishman Speyer edged out its main rival, the joint venture of the Durst Organization and Vornado Realty Trust, in a fierce bidding war that extended into the early part of this week.

“It’s just a better deal,” the chief executive officer of the MTA, Lee Sander, said yesterday. The Tishman Speyer bid was $112 million more than the Vornado-Durst bid, although in a final push late Sunday night cut that difference to $38 million.

Mr. Sander said the billion-dollar infusion would immediately go toward plugging a $700 million gap in the agency’s budget.

Tishman Speyer now has tentative approval from the MTA for a 99-year lease. The two sides have two weeks to iron out the final details of the lease, and there is a possibility, while remote, that the deal could fall apart.

Under the agreement, construction can begin almost immediately on the eastern rail yards pending final approval, but the western portion requires rezoning and will have to go through the city’s land use review process before ultimately getting approval from the City Council. The MTA is expecting that construction on the western site could start at the end of 2009, but the city’s land use review process is notoriously slow and can sometimes drag on for years. In addition, many are predicting stiff resistance from Community Board 4, which has criticized the Tishman Speyer plan for failing to offer enough so-called affordable housing — just 300 units, the least among the five original bids.

The other bidders were Extell Development Co., the Related Cos., and Brookfield Properties. Led by Jerry Speyer and his son Robert, Tishman Speyer now begins the process of convincing the Bloomberg administration and the council — notably Speaker Christine Quinn, who represents the district — that its vision of 13 million square feet encompassing 13 new buildings, including four soaring office towers, has the appropriate balance of uses.

Yesterday, Ms. Quinn, who is said to be considering a run for mayor in 2009, addressed the issue of affordable housing: “This proposal is going to go through the land use process and end up before the City Council, and one of the things I had said throughout this entire process is that I want this part of the city and my district rezoned and developed. But my highest priority is to have as much permanent affordable house as we can.”

Tishman Speyer plans to build 8.1 million square feet of office space and about 3 million square feet of residential housing, with 3,000 residential units. The MTA said the number of “affordable” housing units was closer to 200. The plan also calls for 500,000 feet of retail space, a school, a cultural center, and 1,450 parking spaces.

The developers must first construct a platform that will extend over the rail yards, which alone will cost Tishman Speyer more than $2 billion. Incorporated in the Tishman Speyer agreement is a clause that penalizes the MTA for any delays in no. 7 line extension. If the line is not completed by 2020, the deal for the Hudson Yards project is off, and the MTA would have to refund the deposit and rent paid by Tishman Speyer. Recently, the MTA has fallen behind schedule and budget on a number of its development projects, notably the construction of a new Fulton Street transit station. Just this week, the MTA said it would have to postpone a $30 million package of service improvements that it had promised to riders.

Both Governor Paterson and Mayor Bloomberg compared the project in its importance to the creation of Rockefeller Center, which was planned during the Great Depression.

“We are in a recession,” Mr. Paterson said yesterday, speaking on a platform perched above idle trains at a press conference staged at the rail yards site. “And yet we stand here today, again in difficult economic times, nonetheless launching what will be a project that we hope will send a serious and enormous signal of the confidence we have in New York City’s future.”