New Orleans had wanted to sign Nelson under the injury exception granted by the NBA, but the league office denied the Pelicans' appeal to allow that exception to be a guaranteed contract, sources told ESPN.
Because Nelson had other guaranteed offers on a one-year, $2.3 million veteran's minimum deal, New Orleans had to waive guard Jordan Crawford to make roster room for Nelson -- something that GM Dell Demps and coach Alvin Gentry had preferred not to do, league sources said.
Crawford's deal was guaranteed for only $250,000.
The NBA feared salary cap circumvention, sources said.
The 35-year-old Nelson has played for 13 NBA seasons, averaging 11.7 points, 5.2 assists and 3.0 rebounds per game.
The Nuggets waived Nelson on Thursday to make room on their roster for Richard Jefferson.