The Dodgers and Lilly have differed all season about how much time he needed to spend pitching in minor league games as he recovered from a series of injuries. The team wanted him to report for another rehab assignment so he could transition from starting to relief work.
Lilly thought he was healthy enough to pitch in the major leagues now.
"Obviously, I'm not happy about what happened. It's a pretty big turn of events from yesterday, where I was getting back on the active roster and I feel like I've got a chance to help us," Lilly said. "It was definitely the healthiest point I've been in a long time."
Lilly signed a three-year, $33 million deal with the Dodgers before the 2011 season but has been limited to just 13 starts over the past two seasons as he dealt with shoulder, neck and back injuries. He was 0-2 with a 5.09 ERA in five starts this season.
The team promoted utility man Elian Herrera to take Lilly's spot on the 25-man roster.
Dodgers manager Don Mattingly said it was a matter of uncertainty about whether Lilly could pitch out of the bullpen for the first time in 10 years. The Dodgers already had two left-handed relievers, J.P. Howell and Paco Rodriguez, in their bullpen.
"We didn't know how long it would take him to get ready. We didn't know how well he could bounce back," Mattingly said. "There were a lot of questions for us."
The Dodgers will be on the hook for the remainder of his $12 million salary. Lilly, 37, said he is hoping to latch on with another team as a reliever. He is 130-113 with a 4.14 ERA over a 15-year career.