It is the first NBA lockout in 13 years and could lead to a loss of games during the 2011-12 season.
The contract between owners and players was set to expire at midnight EDT Thursday, but several hours prior to that deadline Commissioner David Stern said a lockout would be put in place.
NBA owners contend they have lost money in a system that pays players 57 percent of the league's revenues. Players have said they would take a slightly smaller percentage, but owners want a complete change in the operating system including a hard salary cap that would place a limit on a team's overall payroll.
Stern said a new proposal by the players Thursday would have increased the current average salary of $5 million a year to almost $7 million in the sixth year of a new contract.
"We have a huge psychological difference," Stern said at a news conference. "The players' perspective, as enunciated by their economist, is that the teams have been happy losing money so they should continue losing money.
"That is a real problem. We (the league) are looking at some profitability. The players are looking to go from $5 million to $7 million, albeit over six years. That is a big gap.
"There has been no animosity in our meetings. But a lack of animosity doesn't get us any closer to closing the divide."
Stern, who became commissioner in 1984, said that "during my time in the league we have gone from an average salary of $250,000 to a salary exceeding $5 million. Now it is the time for a return on the investment and we need to give all 30 teams a chance to make a profit and compete."
Union chief Billy Hunter said the players would hope to be able to continue negotiations in a few weeks.
"But the clock is running," he said, "as to whether there will or will not be a loss of games."
"We had a great year in terms of the appreciation of our game," Stern said. "It just wasn't profitable for our owners."
During the lockout the various team facilities will be closed to the players. The NBA thus joined the National Football League in a labor dispute that has essentially severed the relationship between players and owners.
Although negotiations have reportedly brought the two pro football sides closer together during recent weeks, the NFL is on the verge of losing training camp time and exhibition games. The first regular-season game is scheduled for Sept. 8.