The 39-year-old guard, one of the NBA's all-time top shooters and the league's career 3-pointers leader, had hinted that he might sign as a free agent with a title contender.
But with only six weeks remaining in the regular season, Allen said he was instead going to reassess his plans for the 2015-16 campaign, in a statement released through agent Jim Tanner.
"Over the past several months, I have taken a lot of time to deliberate what is best for me," Allen said. I have ultimately decided that I will not play this NBA season. I'm going to take the remainder of this season, as well as the upcoming off-season, to reassess my situation, spend time with my family and determine if I will play in the 2015-16 season."
Allen has averaged 18.9 points, 2.6 rebounds and 2.2 assists over 1,300 NBA games with the Milwaukee Bucks, Seattle SuperSonics, Boston Celtics and Miami Heat. He helped Boston win the 2008 NBA crown and Miami take the 2013 title, each time in his first season with the club.
But Allen, who turns 40 in July, did not stay with the Heat after the departure of James last July for Cleveland forced a major revamp of the Heat lineup.
The Cavaliers have rebuilt and added talent around James this season and compiled a 38-24 record, fourth-best in the Eastern Conference but hot on the heels of Chicago and Toronto.
Some expected Allen, who helped the US win 2000 Sydney Olympic gold, to reunite with James in Cleveland, but the Cavaliers swung a trade deadline deal for shooting guards J.R. Smith and Iman Shumpert.
"Ray has received enormous interest from a number of NBA teams throughout this season," Tanner said.
James passed Allen on Tuesday for 21st on the NBA's all-time scoring list, moving three points ahead of Allen's 24,505 career scoring total.