Goal exclusively revealed in July that the Croatia international is among David Moyes' midfield targets if the Red Devils fail to sign Barcelona's Cesc Fabregas this summer.
Modric, who joined Madrid from Tottenham in August 2012, made 33 appearances in La Liga last season under Jose Mourinho, and Ancelotti maintains the 27-year-old is part of his plans for the new campaign.
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"We have not spoke about any player leaving, so it's not true that Modric will leave.
"He's very important to us. He will play here this season."
The midfielder had an indifferent 2012/13 campaign scoring three goals and making three assists as Madrid relinquished their Spanish title to fierce rivals Barcelona.
And despite the club's recent purchase of Real Sociedad midfielder Asier Illarramendi for €39 million (£34m), Ancelotti's latest comments suggest Moyes will again be thwarted in his pursuit of a top-class addition to his midfield.