Nilmar was strong linked with a move to Sao Paulo earlier this month, with the Brazilian outfit reportedly willing to meet Villarreal's €8million asking price.
However, Sao Paulo director of football Adalberto Baptista revealed on Thursday the move was no longer on, after the club failed to agree personal terms with the player.
"Unfortunately there was no agreement with the player's agent to ensure the negotiations' success, which for now has led us to pull out of the deal," Baptista told Globoesporte.
"The agent and the player have every right to look for the best deal possible when signing a new contract, but Sao Paulo could not break their salary policy that has been in place for years.
"This has brought the club a financial stability that has been invaluable in times like these, when so much is heard of delays and non-payments in salaries."
Villarreal continue to struggle in La Liga and are currently 18th in the table.