Chelsea suffered a huge setback last night when Carlo Ancelotti rejected the opportunity to become their manager. The AC Milan coach had emerged as the personal choice of Roman Abramovich and the Chelsea owner had offered a contract worth £7 million a year after several meetings with the Italian, the most recent of which is understood to have taken place in Paris on Monday.

However, despite Chelsea’s belief that their offer would be enough to end his seven-year reign at the San Siro, Ancelotti last night insisted that he would be staying at Milan after a 90-minute meeting at the ground with Adriano Galliani, the club’s vice- president. “I’m staying at Milan for sure,” Ancelotti said. “I’m 150 per cent certain I will stay.”

Many at Chelsea are privately furious at Ancelotti, believing that he has led them on to gain an improved contract at Milan. Chelsea did not deny speaking to him, stating only that they have not reached agreement with any manager or approached any club to speak to one of their employees. The club believe that there is no obligation under Fifa rules to ask permission before speaking to the manager of a foreign club, as there is in the Barclays Premier League.

“Contrary to reports, Chelsea Football Club has not reached agreement with any individual to become manager, nor have we sought permission from any organisation to talk to their manager,” a club statement read.

“We’re extremely happy with how our search is progressing.”

In many respects, Ancelotti represented an odd choice because he does not fulfil many of the criteria set out by Chelsea last weekend. The former Milan midfield player speaks little English, is a conciliatory figure and, despite an enviable track record, including two Champions League triumphs and one Serie A title with the Rossoneri, has attracted considerable criticism for favouring a defensive style of football.

However, in his favour was his relationship with Abramovich, whom he has known since the Russian billionaire bought Chelsea five years ago. Ancelotti, 48, is a quietly spoken diplomat used to working with powerful owners, while others at Chelsea had hoped that he could help to fulfil Abramovich’s fantasy of bringing Kaká to Stamford Bridge.

Having dismissed Avram Grant on May 24 in the wake of Chelsea’s Champions League final defeat, Abramovich first held talks with Ancelotti in Geneva nine days ago, when he asked for his views on younger candidates such as Roberto Mancini and Frank Rijkaard. Soon, though, the Chelsea owner was ready to make Ancelotti the highest-paid coach in the world, topping the £6 million salary of Fabio Capello, the England manager.

Chelsea must now return to the drawing board. Luiz Felipe Scolari, the Portugal coach, is still in contention and they have not ruled out a late move for Mark Hughes, the Blackburn Rovers manager, who was holding talks with Manchester City officials in London last night. Luciano Spalletti, of AS Roma, is also being considered.