A Newscorp report has claimed United had been in talks with the 29-year-old's agent for a number of weeks but were informed on Thursday that he would be instead returning to Brazil to sign for his former club Sao Paulo.
It is believed they had been given the all clear by the FFA to use the A-League marquee fund to help get the deal over the line.
Despite missing out on signing the former Serie A Young Footballer of the Year, Western United director of football Steve Horvat insisted the club's hunt for another big name addition is far from over.
"We will continue to look for a quality second marquee to complement our signing of Greek international Panagiotis Kone," he said.
"We want to bring quality and excitement to the fans of Western United and football fans across Australia."
Pato made his name in Italy's top flight after being signed by Serie A giants AC Milan as a teenager before going on to score 51 goals for the club in 117 games over six seasons.
He had spent the past two seasons playing in the Chinese Super League for Tianjin Quanjian where he found the back of the net 36 times in 60 appearances.