The 23-year-old full-back, who spent last season at Espanyol, has seen his hopes of remaining in his native Spain scuppered by an inflammation of the pelvic area
It emerged in July that Los Che had agreed to hand over an initial €700,000 for the Rossoneri defender, with a view to a permanent transfer to Mestalla next summer.
The deal was expected to be formally announced by Sunday, but the Spain Under-23 international, who spent last season on loan at former club Espanyol, is now on his way back to San Siro.
"AC Milan announce that, due to a mild inflammation of the pelvic area, the player Didac Vila will return to Milan and rejoin the first team," a statement on the Italian outfit's official website read.
The collapse of the transfer is a major blow for Valencia, as they had identified Vila as the perfect replacement for rampaging left-back Jordi Alba, who completed a move to Barcelona in July.
The 23-year-old Vila arrived at Milan during the 2011 January transfer window, but made just one appearance in Serie A before being sent back to Catalunya on a temporary basis.