Alex Ferguson was ready to make Tevez one of the highest earners at Old Trafford after he agreed a £25.5million fee.
But after lengthy negotiations between United chief executive David Gill and Tevez's advisor Kia Joorabchian, the deal fell through.
A United statement said: "Following contact received from Carlos Tevez's advisors last night, in advance of the deadline the club set for concluding negotiations, Manchester United announces that Carlos will not be signing a new contract with the club.
"The club agreed to pay the option price of £25.5m and offered Carlos a five-year contract which would have made him one of its highest paid players.
"Disappointingly however, his advisors informed the club that, despite the success he has enjoyed during one of the club's most successful periods, he does not wish to continue playing for Manchester United.
"The club would like to thank Carlos for his services over the last two seasons and wishes him good luck for the future."
United's bitter rivals City are now the clear favourites to sign Tevez.
City boss Mark Hughes is on the verge of an £18m deal for Blackburn's Roque Santa Cruz and have also been linked with Barcelona's Samuel Eto'o.
Hughes has already wrapped up a £12m move for England midfielder Gareth Barry.
oh well, MU is hitting brick walls after brick walls...