In New York, a wedding ring is a conditional gift. The wedding has been cancelled, so normally, the ring should be returned to your fiance. Yes, he can sue you, and no, the fact that he was too cheap to buy a birthday gift and tried to make the ring do double-duty probably doesn't matter.
The fact that he initially told you to keep it probably does count in your favour, but you'd have to talk to an attorney about it. I don't know whether your assertion that he said to keep it would hold up in court. Given how little second-hand engagement rings are worth, I doubt it's worth the trouble.

