The International Olympic Committee voted day to put wrestling back on the roster. Squash trailed in third place, winning 22 votes out of 95 cast, behind 49 for wrestling and 24 for baseball/softball.
Khan, who set a record of 10 British open titles in 1991, said he would not be deterred from fighting hard for squash.
"I have been very passionate about squash's inclusion in the Olympics, so the decision is not only surprising but also shocking," Khan told AFP.
Khan, who won six world titles and had three stints as president of the World Squash Federation, said his sport had come the closest yet to being inducted into the Olympics.
It has been a disappointment for squash fans. In 2005 the sport topped the vote but failed to get the required two-thirds majority. It failed again in 2009.
Khan said squash had everything needed for the Olympics.
"Squash meets all the demands of an Olympic sport, we have a big audience and as a global sport it has its importance," said Khan.
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