The European champions have been linked with the England international, although the Reds are said to be close to agreeing a new contract with the teenager.
But Ancelotti says the 'extraordinary talent' already at the Bernabeu means Sterling is not in his plans - despite the fact that he is 'one of the best [players] in Europe.'
"Sterling is a player of great quality, certainly one of the best in Europe," he told The Sun.
"But we already have extraordinary talent here. It's clear that Sterling is not in our plans."
Meanwhile, the Italian also admits he tried to sign Liverpool skipper Steven Gerrard when he was at AC Milan.
"He's one of the players I would have loved to coach," Ancelotti told The Sun.
"And I thought about him so many times in the past when I was at Milan. But it was impossible because he was very much linked with Liverpool. We had sounded him out but Gerrard's bond with Liverpool was unbreakable.
"I don't remember exactly what year it was but we did try. Of course, I wanted to pair him up with Pirlo, it was a fantastic combination.
"Putting Gerrard in midfield with Pirlo. It would have been fantastic."
Of course, with Real Madrid playing Liverpool in the Champions League this Wednesday, this could just be a classic case of mind games from Mr Ancelotti...