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Galliani, speaking in Italy after returning from talks in London, said Milan had put the brakes on the deal following the decision of Brazilian striker Alexandre Pato to stay at the Serie A champions.
"The whole operation was connected, in that one would leave and the other would arrive," he told Gazzetta dello Sport.
Pato, signed by Milan as an 18-year-old in 2007, had been linked with big-spending Paris St Germain but announced earlier on Thursday that he wanted to stay put.
"I should say that I'm happy, it's a good omen," said Galliani. "I think the player should have the right to choose his life.
He added: "I'm not talking about a "no" from Pato to PSG, it's been his desire to stay at Milan. He was thinking about it for several days and that's fine."
Galliani declined to comment on speculation that Tevez, who has not played for City since September when he refused to come off the substitutes' bench and warm up during a Champions League match at Bayern Munich, could go to PSG or rivals Inter Milan.
"I'm not in favour of one or the other, I know what's happened but I'll keep it to myself," he said.
City have until the end of January, when the mid-season transfer window closes, to find a buyer for the controversial Argentine.
