The 9m (30ft) tall red and blue statue, dubbed the ZiggyZag, was proposed for middle of Brixton, Bowie's birthplace.
The campaign needed to raise £900,000 but had gathered £50,000 in pledges by its four-week deadline, so no funds will be taken from people.
Organisers still hope to create an "appropriate piece of public art".
The proposed site would have been five streets from Bowie's Stansfield Road birthplace and next to Jimmy C's internationally famous Aladdin Sane mural, which has become a focal point for tributes since the artist's death.
The design team behind the project, This Ain't Rock'n'Roll, said thousands of pounds was pledged within hours of the launch of the campaign in February.
"If someone had told us a year ago that we'd raise £50,000 from nearly 700 wonderful people in just three weeks we wouldn't have believed it possible," a statement from the group said.
"Thank you from the bottom of our Bowie-obsessed hearts for supporting us."
"Of course, £50,000 doesn't go anywhere near realising the ambitions of the ZiggyZag," they added.
"It will be no surprise to anyone that this crowdfund isn't going to hit its target."
But the statement added: "We are still determined to celebrate David Bowie, in Brixton, with a challenging and appropriate piece of public art.
"We're just going to have to approach the fundraising in a different way."
The proposed memorial took its inspiration from the cover art on Bowie's sixth album, Aladdin Sane, which was released in 1973.
It had the support of Lambeth Council, which began discussing the possibility of a permanent memorial with Bowie's family in 2016.
Plans to create a huge lightning bolt memorial to David Bowie in south London have been scrapped after a crowdfunding campaign fell short of its target.