Add it to your site. You want people to know the blog is part of the site, and you want people to be able to get from your site to the blog and vice versa easily. Also, you want your site's rankings to benefit from the traffic you bring in via the blog, and vice versa.
To make it be treated as part of your site, you should set it up under a URL like mysite.com/blog, vs. blog.mysite.com. The subdomain approach will get your blog treated like a new site.