The 19-year-old winger, a product of Wolves' academy, spent the whole of last season on loan at London Road.
But though the clubs agreed a fee for his permanent move, Mendez-Laing has himself pulled the plug on the deal.
Writing on Twitter, Posh owner Darragh MacAnthony said: "Terms agreed with lad's agent for better contract than his current one. Then I'm told by his agent he wants more. So we move on."
Mendez-Laing said on the social networking site: "Don't think I'm too good [for Peterborough] just wasn't right for me."