But McKennie was not fully convinced by the capital club and is instead favouring a move to the Premier League.
Hertha also realised that when combining the fee and salary over the next four or five years, he would cost well over €40m.
The cancellation of the deal comes as a surprise as Hertha had been expected to sign the USA international.
Schalke wanted €25m and Hertha were offering €20m, so the clubs were getting closer to an agreement.
McKennie and Schalke must now wait and see if other clubs step forward.