The Eastlands outfit had been looking to bolster their defence and Henchoz was the man they targeted.
Up until Tuesday it is believed that Kevin Keegan was very hopeful of sealing a deal.
However, Liverpool pulled the plug on the deal due to their own problems in the transfer market.
The Reds had been looking to snap up Mallorca defender David Cortes, but that deal floundered meaning Rafa Benitez opted to keep Henchoz.
It is even believed that City had agree to take on Henchoz without a fee, but Keegan was left without his main target as the deal was scuppered.
Keegan is likely to maintain an interest in Henchoz, who has now slipped behind Jamie Carragher in the pecking order at Anfield.
cara peking order The England international was sold to the Spanish giants for a bargain £8million last month, in a deal that also saw Real fringe-midfielder Antonio Nunez move to Anfield.
Owen’s sale was seen as disastrous by some connected with the Reds, yet Benitez insists the sale was inevitable and engineered by the player and his agent.
"We could not control the Owen situation," said Benitez. "His agent had made a decision and subsequently the player found Madrid attractive. His departure was inevitable. My job was to get the most money possible from Madrid.
"Owen is a great professional who will benefit Madrid. At Liverpool he was an important figure, but life goes on without Owen. The fans understand and are not worried. I would have played him had he not decided to go to Madrid - that is clear though."
Benitez has also revealed that tabloid speculation he wanted Morientes as part of the deal was true, although the Spanish international stayed in Madrid after giving his manager his word.
"I wanted to include him in the Owen transfer, to compensate for the fact that Madrid were only paying €12 million,” added Benitez. "But he did not come to Liverpool because the player had given his word to Camacho that he would stay. That was that."
Liverpool manager Rafa Benitez has defended his policy of bringing in Spanish players following his arrival at the club in the close season.
"I have been accused of killing off the English spirit at Liverpool," Benitez told Spanish sports daily AS on Thursday. "But I think that is being disrespectful to the many non-English players who are at the club.
"I've said before that Arsenal had only one Englishman in their starting line-up and they won the premiership and that the important thing is to win titles, have quality players and play good football without worrying about anyone's nationality.
Liverpool have signed four Spanish players since Benitez moved from Valencia to Anfield in June.
"The Hispanicisation of Liverpool has taken place because in terms of quality and value for money I've preferred to sign players I know who can be purchased for a price that is within our budget.
"All the fans are interested in is for Liverpool to win and play entertaining football."
Benitez said he had tried to sign England centre back Jonathan Woodgate before he completed his 20 million-euro ($24.39 million) move from Newcastle United to Real Madrid and had also pushed to get Spanish striker Fernando Morientes included in the Owen deal.
"Woodgate is a very interesting player and I asked Liverpool about signing him because I was given some excellent references. But he was very expensive and the fact that he was injured made us delay a little and by the time we'd decided to buy him Real had made an offer we couldn't match.
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