Schuster claims that he talked about signing an offensive midfield player after the friendly against Stoke City at the weekend and that he never suggested Real should make an offer for Ballack.
Media in England and Spain went into overdrive after it was reported that Schuster had openly requested that Madrid bid for the former Bayern Munich star.
"I was very surprised myself," Schuster told the Spanish media. "I said one thing and it came out in the press as something completely different.
"At no time did I say that we should make an offer for Ballack, but I did say that we need to be looking at players in Europe that play like him.
"There is no interest in Ballack on our part."
The misquoted news saw speculation rise that Real were preparing to test Chelsea's resolve to hang onto Ballack with a major bid.
Deco's revelation that he would be keen to work under Jose Mourinho again added fuel to the fire as he was seen as the player to step in should Ballack leave.
While the Ballack story has been firmly denied, Schuster is still keen to persevere with a move for Chelsea's Arjen Robben, Milan star Kaka and Feyenoord ace Royston Drenthe.