Liverpool had agreed personal terms with Figo after Madrid said the Portugese captain could leave on a free transfer. However, once Liverpool and Figo had agreed a deal Madrid demanded a £2m transfer fee.
Liverpool have refused to pay the £2m and Rafael Benitez says it is now unlikely Figo will join former team-mates Fernando Morientes and Antonio Nunez at Anfield.
Benitez said: "That move is getting more and more complicated and we have told Madrid that we are now looking elsewhere for possibilities in that position."