OBJECTIVES: I. Determine the maximum tolerated dose (MTD) of FdCyd administered with a fixed dose of THU in patients with acute myelogenous leukemia (AML) and myelodysplastic syndrome (MDS), once daily on days 1-10 of a 21-day treatment cycle. II. To describe the toxicities of FdCyd/THU in patients with acute myelogenous leukemia (AML) and myelodysplastic syndrome (MDS). III. To document all clinical responses and hematologic improvement in patients treated with FdCyd/THU. IV. To obtain preliminary information regarding the effect of FdCyd/THU on deoxyribonucleic acid (DNA) methylation patterns in peripheral blood mononuclear cells and bone marrow aspirates, including malignant myeloid cells; the ratio of gamma- to beta-globin messenger ribonucleic acid (mRNA) in blood cells; and serum cytokines. OUTLINE: This is a dose-escalation study of FdCyd. Patients receive FdCyd intravenously (IV) over 3 hours and THU IV over 3 hours on days 1-10. Courses repeat every 21days in the absence of disease progression or unacceptable toxicity. After completion of study treatment, patients are followed up for 4 weeks.