The 32-year-old turned down the offer of a one-year deal as he was looking for two years.
He will be now available on a free transfer next summer unless Villarreal come back with an improved contract.
Top target: Liverpool are tracking Joan Capdevila after he turned down new deal
Capdevila's agent Horacio Gaggioli admitted there was a chance the defender could still stay in Spain but it depended on Villarreal.
He said: 'There are offers on the table but we're waiting on Villarreal. He's happy there but he would also like a contract that reflects his work on the field. We will have further talks in the future.'
The chance to sign Capdevila on a free transfer is an attractive proposition for Liverpool and the player is is also close to Anfield goalkeeper Pepe Reina which could sway his decision to move to Merseyside. Liverpool still in the race to sign Sampdoria defender Reto Ziegler Liverpool keep eye on Eden Hazard and Gervinho as Hodgson watches Lille duoLIVERPOOL FC