The 40-year-old German, who won the world title seven times before retiring in 2006, had been primed to replace the injured Felipe Massa in the Ferrari team for the race in Spain and possibily for the rest of the season.
But he injured his neck in a motorcycle accident in February and medical tests showed that he had yet to fully recover.
"Yesterday evening, I had to inform Ferrari President Luca di Montezemolo and Team Principal Stefano Domenicali that unfortunately I´m not able to step in for Felipe," Schumacher said on his website.
"I really tried everything to make that temporary 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 possible.
The door for a sensational Schumacher comeback to the sport he dominated for so long was opened when Brazilian Massa sustained serious head injuries during qualifying for the Hungarian Grand Prix in Budapest on July 25.
That ruled him out for the rest of the season and the Italian team immediately turned toward their former top driver to step in.
His planned comeback to racing added more spice to what has already been a dramatic season, but was not welcomed by all, especially Formula One rivals Williams, who invoked rules and regulations to block his testing Ferrari´s current car ahead of Valencia.
That would have left him desparately short of practice for the race, but as it turned out it was physical more than mechanical reasons that spoiled his return.
"The consequences of the injuries caused by the bike-accident in February, fractures in the area of head and neck, unfortunately have turned out to be still too severe," he said.
"That is why my neck cannot stand the extreme stresses caused by Formula 1 yet. I am disappointed to the core.
"I am awfully sorry for the guys of Ferrari and for all the fans which crossed fingers for me. I can only repeat that I tried everything that was within my power. All I can do now is to keep my fingers crossed for the whole team for the coming races."
Ferrari announced that the team´s test driver Luca Badoer would take the place of Schumacher replacing Massa for the European Grand Prix.
The 38-year-old Italian has competed in five Grands Prix during his career, the last being in 1999.
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