The Blues have been competing with Paris Saint-Germain to sign Ugarte for the start of the summer transfer window and have held extensive talks with the player’s representatives over the past few weeks.
Both Chelsea and PSG are willing to meet the €60 million (£52.2million) buyout clause in Ugarte’s deal with Sporting.
But it appeared that the Uruguay international was favouring a move to the Premier League.
However, PSG vastly improved their initial contract proposal and Chelsea are now unwilling to match the offer from the French Ligue 1 champions.
The report added that PSG’s contract offer jumped from €5million (£4.3m) to €10million (£8.6m) per season.
Meanwhile, Chelsea had medical tests booked for Ugarte as they were confident that the player would reject a move to PSG.
