Schumacher, a seven-time F1 world champion, had agreed to help out former team Ferrari and step in for Felipe Massa temporarily after the Brazilian suffered head injuries at the Hungarian GP last month.
But the German has now abandoned the comeback after failing to shrug off the injury suffered in a motorbike accident in February.
He will be replaced by Ferrari test driver Luca Badoer for the European GP in Valencia on August 23.
It is a huge blow for Ferrari, in particular, but also the sport and there was no-one more disappointed than Schumacher himself.
“Unfortunately I’m not able to step in for Felipe,” said Schumacher.
“I tried everything to make that comeback possible, however, much to my regret it didn’t work out.
“Unfortunately we did not manage to get a grip on the pain in the neck which occurred after the private F1 day in Mugello, even if medically or therapeutically we tried everything.
“I am disappointed to the core. I am awfully sorry for the guys at Ferrari and for all the fans.”
Badoer last raced in Formula One a decade ago. He made 48 starts for Lola, Minardi and Forti Course but failed to register a single point.
Eddie Jordan claimed F1 had been “robbed” after learning of Schumacher’s withdrawal.
“Ferrari would have had the best medical people on the case but he is not up to the job. We’ve been robbed because I wanted to see how he could cope with these young guys.”