Ancelotti, 58, was the favourite to take over after Giampiero Ventura was fired following Italy's shock failure to reach the World Cup final for the first time in 60 years.
"Yes the federation contacted me, I spoke to them. I told them what I am telling you now, that I am honoured by so many people wanting me to be the coach of the national side," Ancelotti told La Domenica Sportiva television show.
"However, that would be like a whole other job. Being a national coach is different to being a club coach, as I still enjoy training and working every day. Italian football also has some problems that need to be resolved," said Ancelotti, who is free since being sacked by Bayern Munich at the end of September.
Former Chelsea, Real Madrid, Juventus and AC Milan coach Ancelotti -- a three-time Champions League winner -- had been the choice of Italian football federation president Carlo Tavecchio who was forced to resign last month.
"Italian football has serious problems and I don't think I'm capable of resolving them all alone. As usual the coach is blamed but that's not how it works. There is a structural problem. For example, why are we the only country in Europe where the stadiums aren't up to scratch and half empty? That isn't the fault of Ventura."
He added: "I realise there is a conflict of interests between clubs and federations, as there is in Germany, France and England, but right now Italian football needs the Federation to impose its power over the clubs and impose new rules to improve the situation.
"For example, I think Serie A would benefit greatly by being reduced from 20 teams to 18 and I know there are clubs who are ready to vote for that."