"During a meeting of Democratic Party executives, I explained Prime Minister Fukuda's idea and suggested that we begin policy talks. But unfortunately it was not accepted, which to me is equal to (a display of) no-confidence," Ozawa said.
He denied that he had originally suggested the coalition.
The Democratic Party has controlled the upper house of parliament since July, allowing them to delay important legislation.
The party has strongly opposed an extension of the Indian Ocean refuelling mission, which was halted last week when the legislation authorising it expired.
Ozawa did not confirm whether he would now leave the Democrats.
Analysts said the Democratic Party could disband if Ozawa left and took supporters with him.
The party is a quarrelsome amalgam of former LDP members, ex-Socialists and hawkish younger legislators who differ on security matters and other important policies.