The oil tycoon and former chairman of the Wood Group had said the money would be on the table until the end of the year to help fund a "transformational" project, and Mr Salmond had written to Aberdeen City Council to back the plan.
However, councillors on both the ruling Labour group and SNP opposition benches voted last night on a motion declaring that the authority's plans for city centre regeneration will not be finalised before then, meaning the money is now expected to be donated elsewhere.
Plans to overhaul the city's Union Terrace Gardens have been a controversial issue after a £140m design was rejected by the council last year, despite being backed by the people of Aberdeen in a referendum.
Mr Salmond had called on the council get off its "high horse".
He said: "I cannot believe that any council in the world that I know of would have snubbed an offer of such generosity, partic-ularly when there was a majority vote in favour in a referendum.
"So it is not only irrational, it defies democratic logic.
"But not to find a way to come to terms and to take that generous donation seems a great tragedy for the citizens of Aberdeen.
"I would appeal at the last minute to the council to get off its high horse and recognise just how dumbfounded people will be if the end result is this money is not accessed - there should and must be a way forward."
He added: "This is a tragedy for Aberdeen since the benefit would have been for the whole of the north-east which wants to see a vibrant city centre."
Sir Ian gifted the cash to the city in 2009 in the hope that the Union Terrace Gardens could be turned into a modern civic square.
More than 86,000 people took part in the referendum, with 45,301 in favour of the new project and 41,175 voting to retain the Victorian gardens.
However, a new Labour-led administration came into power a few weeks later and the scheme was scrapped. Sir Ian kept the cash on the table for a year following the decision.
He even said he would now consider putting the cash to another transformational project other than the Union Terrace Gardens as long as it would "truly impact" the city's economy.
It is understood Sir Ian's money will now be spent on the Wood Family Trust's charitable projects in Africa.
City Centre Regeneration Board chairwoman, deputy council leader Marie Boulton, said: "I want to be very clear that this council is not rejecting the generous offer made by the Wood Family Trust, but we are unfortunately unable to meet the deadline set.
"A lot of things have to move forward and one of those is discussions with Network Rail. It is important that those discuss-ions take place, but that and the masterplanning process will take some time." She said they are not ruling out working with Sir Ian and the trust in future.