Jose Grande, the Spanish selector, said: "Indurain isn't in a good enough condition to ride in the championships."
Indurain, 32 and the world time-trial title holder, withdrew from the Tour of Spain last Friday suffering from bronchitis.
It has been widely anticipated that Indurain would announce his retirement at the end of the season.
Although Indurain won Olympic gold in the time-trial at Atlanta he showed signs that his previous dominance over his rivals was waning when he finished a disappointing 11th in the Tour de France -- missing the opportunity of winning a record sixth consecutive Tour.
His Banesto team are believed to have lined up reigning road race world champion Abraham Olano as his replacement.