I believe they offered a deal to do two or three movies to finish it up, but he wouldn't do it. Aparently he had the whole thing planned out from the start to consist of three 'books' with each 'book' being made out of two seasons. He basically said there would be no way to do it in the movies while retaining the quality he wanted and there was no way he'd be able to tie up all the loose threads in that ammount of time....or something.
It really is a shame, but in an interview he did reveal quite a bit about where it was going and it was pretty interesting.
I also agree about Deadwood, it was very good, but no where near as great as Carnivale. Probably the best TV show I've ever seen.