The link road would have cost £39m in total and would connect the A442 Queensway, known locally as the EP, with the motorway.
Telford & Wrekin Council said it was disappointed by the decision and hoped to secure funding in the future.
It was hoped the scheme would provide a faster connection to the M54 at junction five, avoiding the need for vehicles travelling between the motorway and A442 having to enter or exit at junction five and use alternatives such as Rampart Way or other local roads to access the A442 Hollinswood Interchange.
It was part of plans by transport body Midlands Connect.
Councillor David Wright, Telford & Wrekin Council’s cabinet member for transport, said: said: "While we obviously regret that we haven’t been successful in attracting funding for the scheme at this stage, we are encouraged that the Department for Transport has indicated there will be future funding rounds.
“We have an excellent transport network in Telford and Wrekin but if we were to have a direct link between our major north/south trunk road and our motorway, then that would make it even better and mean the borough is more accessible.
“The Forge island at Junction Five of the M54 is extremely busy and having a motorway link that bypasses that would be brilliant for our economy and mean there are direct links to our industrial estate at Stafford Park, Halesfield and Hortonwood.
“I hope that the Department for Transport will look favourably on our scheme in the next funding round when it is announced.”