According to an interview published by Goal.com, Bayer Leverkusen midfielder Ballack, 35, notified New York of his availability but was rebuffed after general manager Erik Soler said he had agreed to sign the Aston Villa midfielder.
"Michael would love to play in New York," his representative Michael Becker told Goal. "However it seems that Soler already made massive promises to Stephen Ireland in October.
"This is an unbelievable incident.
"There are a lot of places where Michael believes he would be a good fit, but in New York with Thierry Henry and Rafael Marquez, that’s a title-winning team, in his mind."
Ballack would certainly be the cheaper option: unlike Ireland, he is out of contract in June and would be available on lower wages than the former Manchester City playmaker, who is believed to earn around £80,000 a week.
But at only 25 the Irishman is a long-term prospect, will appeal to the large Irish market in American soccer, and would have resale value.
Furthermore, New York want an attacking midfielder, with Soler apparently telling Becker that Ballack is more of a defensive option at this stage of his career.
"Ask Erik Soler why he thinks Ballack is a central defender or just a holding midfielder. It's a pretty exclusive point of view," Becker fumed.
"Why would you go for a no-name player who no one knows, who hasn't started in months, when Michael Ballack is available?"
Becker said that Ballack would still probably move to North America, adding: "I'm sure you'll see Michael playing somewhere in MLS at that stage."
Philadelphia Union, Chicago Fire and Montreal Impact have also been linked with the former Bayern Munich and Chelsea midfielder.
Ireland has struggled for form since joining Villa nearly two years ago, leading to an unsuccessful loan spell at Newcastle that saw him make just two Premier League appearances.
His professionalism has also been questioned, with Villa boss Alex McLeish criticising his behaviour after a picture of him smoking a hookah pipe appeared on a social networking site.
Ireland retired from international football in 2007 after a much-publicised incident in which his partner told Irish officials the player’s grandmother had died, asking for him to be excused from national team duty. It later transpired his grandmother was well and that his partner had in fact suffered a miscarriage. He had four goals in six matches at that stage.
For all his faults though Ireland is an accomplished playmaker and his signing would be seen as a coup for MLS, who have hitherto signed young prospects and stars in the swansong of their careers.