The Spain international is widely considered to have been the Red Devils' top attacking target for the summer, only for talks to drag on as Los Blancos were demanding a far larger fee than United were willing to pay.
Mourinho admits that it is a "shame" to have missed out on the ex-Juventus ace, accepting that any chance of getting a deal over the line is now all but dead.
"It is a question for Florentino [Perez]," Mourinho told reporters. "He belongs to Madrid. Madrid has decided and we have not come to an agreement. It is simple. It's a shame.
"It is a player who made it to the first team with me. We have a special liking for [him], he is someone special. I enjoyed watching his evolution in Juventus and Madrid. It is like that. I don't think he can end with us."