Khatami urged dozens of MPs who have been sleeping on floors in parliament since Sunday to end the sit-in and go back to work on Wednesday.
The unelected hardline Guardian Council constitutional watchdog has barred reformist lawmakers from standing in the 20 February vote, triggering threats of mass resignations from cabinet members.
However, MPs swiftly rejected Khatami's conciliatory approach.
"It's natural for us to continue because we haven't achieved our demands yet," said Muhammad Reza Khatami, younger brother of the president and deputy speaker of parliament.
The decision was a further blow to the weakened authority of Khatami, who is also under pressure from cabinet colleagues and state governors to take a firm stance against the hardline move.
President under pressure
Khatami had told MPs he was hopeful negotiations would bear fruit with the Guardian Council about its decision to bar almost half of the 8200 aspiring candidates from the race.
Most of Khatami's cabinet, including four vice-presidents and 12 ministers, have said they will resign within a week unless the election bans are overturned. State governors have issued the same warning.
Reformist MP Ahmad Moradi (R)
hands over his resignation
But the Guardian Council said on Tuesday it would not be pressured into lifting the election bans.
Khatami called for unity on Tuesday, telling state governors: "We will leave together (or) we will stay together."
Even close allies of Khatami, who swept to power in 1997 on a platform promising to promote civil rights and the rule of law, now criticise him for failing to stand up to hardliners.
Iran's complex political system means that although elected reformists currently run the government and hold a majority in parliament, unelected hardliners who control the judiciary, armed forces and constitutional oversight bodies such as the
Guardian Council have been able to block most reform attempts.
The reformers say they do not want to dismantle clerical rule, only to place more emphasis on the rule of law and citizens' rights.
Many of Iran's disproportionately youthful population have already lost faith in Khatami's ability to overcome conservative resistance, and the public have shown no sign of rallying to the reformists' cause.
Analysts say the disqualification of candidates was a crude attempt by hardliners to prevent a repeat of the 2000 election, when reformists won about 70% of seats in parliament.
Pro-reform Parliament Speaker Mahdi Karroubi echoed Khatami's opinion that a negotiated settlement could be found.
"I'm confident that the Guardian Council will reconsider. It has no choice," he told reporters.
He said if talks with the Council failed, the reformists would appeal to Supreme Leader Ayat Allah Ali Khamenei.
Khamenei, who has the last word on all state matters and has tended to side with hardliners in the past, said on Monday he would get involved in the row only if other methods failed.