The animated band's frontman offered the Sex Pistols singer the chance to appear on latest LP 'Plastic Beach' - which features collaborations with Lou Reed and Snoop Dogg, among others - but was turned down.
Lydon - also known as Johnny Rotten - told the Daily Star newspaper: "They gave me a bell but the answer was 'no'. I really don't want to be dabbling in other people's gene pools.
"I've worked with so many so-called famous people over the years but it's never been for any deliberate financial motivation.
"If I did it wouldn't be a business phone call followed by a management agreement and then for an album manufactured and marketed as to what the current popular trends were."
Instead, the 'God Save the Queen' rocker is concentrating on his venture with his recently reunited band Public Image Limited (PiL) - who he first formed in 1978 - but he is disappointed the group haven't received any offers to perform at this summer's British festivals.
He explained: "We haven't had any offers. They have been quite negative, which has astounded us because PIL is the perfect festival band. You don't want U2 - that's a band that never should have existed, there's no life experience in any of their songs."