"The Knicks and Rockets were closing in on a blockbuster deal yesterday that not only would bring Tracy McGrady to New York -- but more important, could open up $9.5 million of additional cap space that would give the Knicks a chance to sign two All-Star free agents to maximum contracts this summer.

"We've made progress," a source involved in the talks told The Post, an indication an agreement could be reached today.

The price the Knicks could pay for getting Jared Jeffries ($6.9M) off their books in this Rockets trade is giving up on their disappointing rookie lottery pick Jordan Hill, and possibly a 2012 first-round pick.

Another league source said last night the holdup is that Knicks president Donnie Walsh is still unsure he wants to surrender Hill. Still, Hill remains on the table as talks continue.

If Hill is dealt, his salary for next season ($2.5M) also would come off the books, which could give the Knicks as much as $35 million in cap room."