I ran a site called SaveDeadwood.net for about three years, following the developments from the time the cancellation was announced up through (and past) when it was time to pull the plug.
The official line was the cost, but I tend to agree with Auntie Pam that Milch may have gotten distracted. I had some correspondence with cast members and none of them ever mentioned a problem with Milch, but I don’t necessarily expect that they would.
The condensed timeline of the key events is:
May 11, 2006 - Word leaks that HBO has not renewed the contracts of the cast for a fourth season.
May 14, 2006 - SaveDeadwood.net goes online and begins an intensive effort to lobby the television press.
May 25, 2006 - Fans organized through SaveDeadwood.net place an ad in Daily Variety.
June 2, 2006 - Chris Albrecht, then-CEO of HBO, and David Milch meet in New York and reach a handshake deal to produce a pair of telepics to bring Deadwood to a conclusion.
May 5, 2007 - Chris Albrecht punches out his girlfriend in Las Vegas following the Floyd Mayweather - Oscar De La Hoya fight and is forced to resign a few days later, essentially nullifying his agreement with Milch regarding “Deadwood”. The new honchos at HBO want no part of “Deadwood,” and Milch subsequently loses interest in doing the films.
July 10, 2008 - Richard Plepler (co-president of HBO following Albrecht’s departure) more or less sticks a fork in it at the TCA Summer meeting.
The Wayback Machine has an archive of SaveDeadwood.net from January, 2009 at Save HBO's Deadwood! - Show and Cast News
No guarantee that any of the links there still work.