Kewell, Australia's first world-class player, had been courted by Sydney FC and Melbourne Victory, with Football Federation Australia offering to bolster any potential deal for the player if he agreed to help with marketing for the struggling A-League.
But negotiations have crumbled over the player's demands to receive a cut of the gate revenues at every away match in which he played.
Kewell's manager Bernie Mandic confirmed that the FFA had baulked at the idea of telling opposition clubs that they would have to pay Kewell if he took part in matches against them.
"The FFA offered to assist in bringing Harry back to play in Australia and asked what it would cost to use Harry to market and promote the sport in partnership with the FFA," Mandic told a local radio station.
"It was a 30-70 split of any additional gate revenue from the away games that Harry plays in.
"If there are no more people coming to the away games that Harry plays in, Harry gets nothing... Now this was not accepted by the FFA, which is fair enough."
The 32-year-old has struggled with injuries over the course of his career and was released by Turkish club Galatasaray after three seasons.
He remains revered in Australia, however, where local clubs struggle to retain their best players in the face of more lucrative deals overseas.
The FFA said in a statement that it had noted Mandic's comments but declined to say whether negotiations were off.
"The fact remains that Harry Kewell would be a fabulous acquisition for any... A-League club and would be a great boost for the competition," it said.
Melbourne Victory managing director Richard Wilson confirmed the club had put forward an offer and were still holding out hope of landing the 2006 and 2010 World Cup forward's signature.
"We've put our best foot forward... to give us the best opportunity to secure one of the greatest players who has played for this country and we would like for him to be here at Melbourne Victory, and we're really hopeful about that," Wilson said.
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