There will be no third season of Flight of the Conchords; the creator/stars have announced that they will not return for a third season.
HBO had previously stated that they were interested in doing another season; the stars declared that they weren’t ready to come back, and finally decided that they wouldn’t. Specifically, they seemed to feel that they had used up a lot of their best material on the show already, and that the longer they went on, the harder it was to come up with ideas. (It might also illustrate the balance that live performers have to strike when they do a TV show: the show is a useful promotional tool, but it’s also dangerous because it over-exposes a lot of material, reducing its effectiveness in performance.) They felt, and some viewers agreed, that they were running short of good material in the second season.
This is the first HBO show in a while that has ended early, and it continues their recent streak of not canceling anything outright. (Though you might rightly point out how annoying it is that they cancelled Deadwood and soon afterward stopped cancelling anything.) They’ve said that Conchords was not a show that commanded a large audience but that it was a “brand enhancer,” presumably because of the hip cred it gave to the network and because it was a funny show in a lineup that will now be a bit comedy-deficient. They’ll have plenty of half-hour shows that aren’t really funny, but not a lot of comedy-comedies apart from Curb.