In a further blow for the Reds, fellow Dortmund ace Christian Pulisic also knocked back the advances of former BVB boss Jurgen Klopp after committing to the club.
Dembele was tipped with making a move to Anfield from Rennes last summer, but the German side won the race to sign him and have since been rewarded with some impressive performances.
The 19-year-old, who has five goals and eight assists in 21 Bundesliga outings this term, told FourFourTwo: "I saw Klopp in Paris but I told him I had made up my mind to sign for Dortmund. I told [Claudio] Ranieri the same thing."
USA international Pulisic added: "I have respect for Klopp and I know him - he was very welcoming to me here - but I was never really thinking about going to Liverpool.
"Dortmund have given me everything. If I work very hard here I will play and I love this club."