Byrne won his third BSB crown with Bird's Kawasaki squad this year, and had been strongly linked with a move to the PBM CRT effort in MotoGP.
Bird offered Byrne a MotoGP seat for 2013, but the 35-year-old has now declined in order to defend his BSB title.
"I was in the enviable position of being offered a ride in either MotoGP or BSB by Paul Bird and after some careful consideration, I thought that the option of staying with my championship-winning team on a great bike in BSB was too strong a temptation to resist," said Byrne, who was due to test the team's MotoGP Aprilia at Valencia last week before bad weather intervened.
Ellison had expected his MotoGP deal with Bird to be a long-term one, and was frustrated to be dropped after a single year.
"I'd said to Paul at the start of the season that I was prepared to put in a year of donkey work on a bike developing and dealing with all the little gremlins, as long as I'm there for the following year, or the following two years," he told Biker FM.
"And that's what we agreed. I was prepared to put all that work in to try and benefit from it in the second year, with a team-mate, winter testing and more budget.
"The last thing I wanted to do was walk away from the BSB and World Supersport Championship where I'd been running at the front, and then have just one year riding around at the back. That wasn't what I was prepared to do."
Bird had intended to expand to two MotoGP bikes for 2013, including a CRT chassis of its own design. The initial plan was to keep Ellison in an all-British rider line-up, but recently Colombian ex-Avintia rider Yonny Hernandez had been strongly linked to a deal.
The team boss reiterated that Byrne's decision to stay put in Britain and the lack of a Hernandez announcement so far did not mean the PBM MotoGP effort was in doubt.
"We are also committed to MotoGP and will be making an announcement soon on our plans in that series," said Bird.
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