How to deal with the confliction between PHP-Markdown and MathJax?

I’m not sure this is a real answer, but have you tried PHP-markdown-extra (by the very same Michel Fortin)?

At least for me (using Mark Jaquith’s markdown-on-save plugin) your example is not a problem.

But Markdown-extra is not perfect either and I’ve seen some other quirks with respect to emphasis, e.g. Let $(y_n)_{n\in \omega}$ enumerate ${ x_i: i \in \bigcup_{n\in \omega} A_n} $ will trip it up.