"We unfortunately could not come to an agreement with Hiroyuki," Yankees general manager Brian Cashman said in a statement. "We wish him the best of luck during the upcoming 2012 season."
The Yankees acquired the rights to negotiate with the 29-year-old Nakajima through the posting process on Dec. 7, offering a reported $2.5 million bid that gave them 30 days to speak freely with Seibu's shortstop and team captain.
To some extent, the Yankees were surprised to have acquired Nakajima's rights with their modest bid, viewing him potentially as a backup to shortstop Derek Jeter, who could also see time at third base and second base this season.
Because the Yankees and Nakajima were unable to reach an agreement, the club will not have to pay any of the posting fee.
Technically, the Yankees had until Friday to reach an agreement with Nakajima, though he would have had to travel to New York and pass a physical by that deadline.
The right-handed-hitting Nakajima is a lifetime .302 hitter in Japan and could be an unrestricted free agent for Major League clubs after the 2012 season.
In 144 games for Seibu in 2011, Nakajima batted .297 with 16 home runs, 100 RBIs and 21 stolen bases. He represented Japan at the 2008 Olympics and in the '09 World Baseball Classic.
Cashman said last week that he was waiting to see how Nakajima's situation would be resolved before resuming his pursuit of other infield free agents, a group that includes veteran Eric Chavez.
The Yankees already have Eduardo Nunez on the roster as a potential backup infielder, but they enjoyed getting contributions from the 34-year-old Chavez at third and first base last season. Chavez is interested in a return to the Yankees, among other clubs.