New Charlton manager Ian Dowie was keen to sign Diao and was reportedly prepared to spend up to £700 000 to snap up the Senegalese 29 year old.
Unless Diao can get himself fit enough to join another club, it now looks like he'll be spending another season at Liverpool.
Diao may not get much of a chance at Anfield next year with Gerrard, Alonso, Sissoko and Zenden all seeming to be in front of the tough-tackling midfielder in the pecking order.
Diao joined the Reds from French side Sedan in a £5million deal in 2002, but made just 19 Premiership starts before being loaned to Birmingham City in January 2005 and then Portsmouth in August 2005.
Injury meant Diao could not even make a dozen appearances in both loan spells and after failing a medical at Charlton it looks as though Diao still hasn't really recovered from the ongoing injuries.