The Manchester United man was a controversial omission from Roy Hodgson's Euro 2012 squad, amid Terry's impending trial into alleged racial abuse of Rio's younger brother Anton, with the coach citing "footballing reasons" for his absence.
Shilton told BBC Sport: "I don't feel Rio should come back.
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"His time has gone. We have to look to the future and I would look to the youth.
"[Gary] Cahill is someone I've always admired and I thought [Joleon] Lescott had an excellent Euros. At the moment, I'd go with those two."
Shilton also hailed Terry's qualities, and claimed that is decision to step down from England duty was "premature" and believes the international staff will have similar thoughts.
"Reading the press, I think Roy Hodgson feels the same way," Shilton said. "Terry was recognised not only for his playing ability, but also for his leadership qualities."