Lancaster has omitted the Leicester fly-half from his Elite Player Squad, spelling the end of the 60-cap playmaker's international career. Only "exceptional circumstances" allow the England coach to select overseas-based players, but those have never been called into action.
Flood will join French Top 14 side Toulouse in the summer, ending five years with Leicester and surrendering the Tigers' club captaincy.
Lancaster has promoted Bath's 20-year-old fly-half George Ford in Flood's place, temporarily adding Northampton's Stephen Myler to his RBS 6 Nations squad too. Lancaster has backed both new playmakers to capitalise on the opportunities.
"I'm disappointed that Toby's chosen to play in France next season," Lancaster said. "I tried to encourage him to stay at Leicester, but it's a great opportunity for George to come in. Toby's been great for us and I respect him and his decision. I've got a great relationship with him, but he understands our policy.
"I would rather make the decision now at this point 20 months out from a World Cup to give someone like George Ford or Stephen Myler the chance to show what they can do now."
Lancaster said Ford's composure in Saturday's 27-27 draw at Leicester cemented the youngster's elevation after progressing confidently through every England age group