General Manager Ray Shero had confirmed the offer, for $2 million, earlier this week and said Jagr had until Wednesday to accept or reject it.
But the team heard nothing from Jagr and the offer was withdrawn Friday, Shero said.
"We made what we thought was a very fair contract offer to Jaromir on Tuesday, based on his stated interest of returning to the Penguins," Shero said. "We made our best offer from the start, given our salary cap structure, in an attempt to facilitate a deal. But now, after several days, with an extended time frame for making a decision, and additional teams getting involved, we have decided to move in a different direction."
Jagr played the first 11 seasons of his NHL career with the Penguins, later joining the Washington Capitals and New York Rangers. He has been with Avangard Omsk in a Russian league the past three seasons.
Jagr scored 646 goals and 1,599 points in 1,273 NHL games.