The Croatia international has been targeted by Manchester United manager David Moyes as an alternative midfield option to Barcelona's Cesc Fabregas
The Croatia international is among David Moyes' midfield targets if Manchester United fail to sign Barcelona's Cesc Fabregas this summer, while he has also been touted in some reports as a potential makeweight in a move for Gareth Bale.
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.
"It is not true that Luka will leave," Ancelotti told reporters.
"All the players are very happy to be here and working well. We have not spoken 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."