OBJECTIVES: I. Determine the response and disease-free survival at 1 year of patients with advanced acute myeloid leukemia or myelodysplastic syndrome treated with gemtuzumab ozogamicin, fludarabine, and total body irradiation followed by allogeneic peripheral blood stem cell or bone marrow transplantation with cyclosporine and mycophenolate mofetil. II. Determine the leukemic blast clearance from the blood and marrow in these patients treated with this regimen. III. Determine the safety and pharmacokinetics of gemtuzumab ozogamicin as part of this regimen in these patients. IV. Determine the incidence of donor stem cell engraftment in these patients. V. Determine the incidence and severity of graft-versus-host disease in these patients treated with this regimen. VI. Determine whether donor lymphocyte infusion can be safely used in the patients with mixed or full donor chimerism to eliminate persistent or progressive disease.