Final terms have not been reached, but an agreement in the broadest terms has been struck and Walsh will take control of the Knicks after this season, according to the source.
It appears current president and coach Isiah Thomas will not be back, though he is expected to receive a healthy severance, the source said. Thomas is making $7 million annually on a contract that runs for three more years, according to another league source.
Many potential aides to Walsh have been rumored, but one candidate to watch is Mark Warkentien, the de facto general manager of the Nuggets in his role as vice president of basketball operations. Warkentien and Walsh have built a longstanding professional friendship and they share the same agent in Steve Kauffman. Also, Warkentien could help revive the career of troubled Knicks forward Zach Randolph, who was drafted by Warkentien for Portland, where he had his best years.
Most important is Warkentien's approach to team-building. As opposed to other GMs who prefer to build over a long period of time via the draft, he is known as an executive who believes in making moves to improve teams quickly. His input would be valuable to Walsh in New York, where expectations are always inflated and the honeymoon promises to be short.
On Tuesday, the Pacers denied that Walsh had agreed to join the Knicks. "Donnie said this morning there's nothing clear about his future," team spokesman David Benner said. "When there is he'll make a statement. He hasn't agreed to anything with anybody."
Walsh announced Monday that he would step aside as CEO and president of the Pacers at the end of this season, his 24th with the organization, giving operation of the franchise a single voice under Hall of Famer Larry Bird. He declined to comment on his future.
The 67-year-old Walsh 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 [for leaving] 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."