Craig Levein had paved the way for Ferguson to return to the national fold following his ban in the wake of the 'Boozegate' affair during George Burley's tenure back in April 2009.
But, having thought long and hard about Levein's offer, the Birmingham midfielder informed the Scotland manager that he would be putting club before country and would not be returning to the international arena.
Larsson knows the decision is good news for the Midlands club and, although claiming the Scots still have plenty of talent within their ranks, concedes that Ferguson will be a significant loss.
Speaking ahead of Sweden's friendly with Scotland in Stockholm on Wednesday, he said: "I would say it's a fairly big blow. Scotland have got a lot of good players but he was superb for us last season.
"He was that type of player that we have been missing at Birmingham for a while and he really produced the goods for us. So from that perspective he would have been very good for Scotland but they have got a lot of very good quality players anyway so we will just have to wait and see.
"I suppose Barry wanted to focus on his career with Birmingham and try to keep that going for as long as possible."
Asked if he was surprised by Ferguson's decision, Larsson replied: "I never really spoke to him much about it but I suppose he felt that he was doing so well at Birmingham and maybe those breaks helped him.
"Going away and playing friendlies and qualifiers for the national team takes it out of you. I think he just wanted to focus on his own career and you can't say any more about that.
"I'm sure the gaffer Alex McLeish is very pleased with that decision but it was up to him and he decided not to come back."
While there may be no way back for Ferguson, Rangers goalkeeper Allan McGregor will make his first appearance since his own role in that infamous drinking session at the Scotland team hotel 15 months ago.
McGregor had no qualms about returning to the national team and will be thrown straight into the clash at the Rasunda Stadion after regular number one Craig Gordon was ruled out with a broken arm.
Larsson said: "I heard that it was his first game back for a while but he is a very good goalie so it won't be any easier for us to score past him.
"Gordon is a very good goalkeeper but we will try to focus on our game and work on the things that we have to do but we know we are going to come up against a very tough Scottish side."
He added: "It's going to be a tough game, a physical game, and it will be more like a Premier League game or a British game.
"I know James McFadden well and they are a very competitive side with a lot of good players. They've got a new manager and we've got a fairly new manager as well and we are both trying to prepare for the Euro qualifiers coming up so I think it will be an interesting game.
"As you know, there are a lot of Scottish people in Birmingham so they didn't really say good luck this time. But hopefully I can go back with a smile on my face."