Terry, 37, spent last season at Aston Villa in a failed bid to gain the Birmingham side promotion to the Premier League.
He has been out of contract since the summer, and looked set to join Spartak after undergoing a medical for the Russian club.
The central defender would have received a reported £3 million salary package for a single term in Moscow, but he has now revealed that talks have broken down.
"After considerable thought, I have decided to decline a contract offer from Spartak Moscow," Terry explained in a statement.
"I would like to take the opportunity to thank Spartak and wish them and their supporters well for the rest of the season.
"They are an ambitious club and I have been very impressed with their professionalism.
"But after assessing this move with my family, we’ve decided this is not the right move for ourselves at this time. Good luck Spartak."
Terry began his career in the West Ham youth system, before moving across London to Stamford Bridge at the age of 14.
He went on to play more than 700 times in a glittering spell with the Blues, winning five Premier League titles as well as the club's first ever Champions League crown in 2012-13.
The defender was also capped 78 times for England before announcing his international retirement in 2012, representing his country at the 2006 and 2010 World Cups.