Hahnemann, who left Fulham under the Bosman ruling at the end of his contract, travelled to Luton today to meet Hatters boss Joe Kinnear who has been searching for a new goalkeeper.
However, after meeting the American today Kinnear has decided that he doesn't want the shotstopper.
A Luton Town spokesman exclusively told Reading MAD: "Mr Kinnear met Marcus Hahnemann today but he has chosen not to take his interest any further."
On Thursday Walsall pulled out of the race to sign the player as he declared that he wanted to sign for the Royals.
However, after Reading chief executive Nigel Howe revealed that the club were negotiating with Marcus' agent newly-promoted Luton Town emerged as rivals for the 'keepers signature.
Hahnemann, who spent a month on loan at Reading last season, is expected to sign a two-year contract with the Royals sometime early next week.