The Eagles are on the hunt for a new boss after Roy Hodgson left Selhurst Park at the end of last season.
Palace had held positive talks with former Borussia Dortmund head coach Favre and there was hope he could be appointed by the end of this month.
However, a deal for the 63-year-old is now off the table after Favre walked away at the 11th hour.
The Swiss, who has been out of work since being sacked by Dortmund in December, is understood to want a longer break from football.
Palace will now have to look at new targets, with Burnley’s Sean Dyche and Swansea boss Steve Cooper two possible candidates.
The club have also considered ex-Chelsea manager Frank Lampard in the past, while talks with former Wolves favourite Nuno Espirito Santo broke down last month.