Arum, however, told the Los Angeles Times that the $38 million offer for the bout had failed to materialise and that the duo could not face each other until the second half of 2017, under revised terms.
"Manny wanted to roll the dice. He rolled the dice and it came up snake eyes (double one)," Arum said of the WBO world welterweight champion. "That deal is done for now."
Arum said Pacquiao's advisor Michael Koncz would deliver a revised proposal for a fight against an alternative opponent that could be staged in July.
"Koncz will meet with Manny, and if he accepts it, we'll go ahead. If he doesn't, there's nothing we can do," Arum added.
Pacquiao (59-6-2) claimed the WBO title with a unanimous points victory over American Jessie Vargas in Las Vegas last November, while the 30-year-old Khan (31-4) has not fought since May 2016.
Khan made an audacious set up to middleweight to take on Canelo Alvarez but the Briton was knocked out by his hard-hitting Mexican opponent in the sixth round.
(Reporting by Hardik Vyas in Bengaluru)
