Jane Hutt, the education minister, made the decision after evaluating an ongoing pilot scheme involving 118 primary and 18 secondary schools that started in 2003.
But she told TES Cymru there will be enough money for every primary school in Wales to develop language learning on a non-statutory basis through the Better Schools Fund (BSF).
The decision means Wales is distancing itself from England, where foreign languages will be mandatory at key stage 2 from 2011, following recommendations from Lord Dearing in his Languages Review final report, published in March last year.
There were fears that making languages compulsory at KS2 would prove unpopular with heads and teachers, and evaluators of the pilot project also doubted the popularity.
Ms Hutt said: "The piloting across Wales, with extensive consultation, led to the view that we shouldn't make it statutory; we should keep it non- statutory in order to have the flexibility in terms of the teaching approaches and the ways in which schools introduce and foster modern foreign languages."
Eighteen Welsh authorities are using the Better Schools Fund to promote languages at KS2.
The languages pilot was launched five years ago by CiLT Cymru, the national centre for languages, on the premise that the younger children are when introduced to languages, the better. A recent independent evaluation concluded that there was huge enthusiasm from pupils and parents.
Secondary schools reported that pupils in the pilot scheme entered Year 7 with an enthusiasm for languages and the knowledge and skills to make accelerated progress through the KS3 curriculum.
Carolyn Goodwin, primary languages advisor for CiLT Cymru, said: "We'd be extremely disappointed if it became dependent on BSF money."
The Assembly Government will receive the final pilot evaluation by the end of 2009, and Ms Goodwin said the project would be "wasted" if Ms Hutt did not wait for the results. However, she warned that Wales, which has only two primary language advisors, is not yet ready to follow England down the compulsory languages route.
"We don't have the infrastructure. We need to build up capacity," she said.
David Rosser, director of the Confederation of British Industry in Wales, is also concerned about primary language teaching depending on the Better Schools Fund.
"Ideally we'd like to see them (languages) taught at an early age, when children find it easy to pick them up," he said.
Assembly Government statistics released this week showed the percentage of pupils in Wales taking GCSEs in foreign languages fell from 41 per cent in 1999 to 28 per cent in 2007, or 12,285 pupils. But the number of pupils achieving A-C grades increased from 67 per cent in 1999 to 76 per cent last year.
Linda Parker, director of the Association for Language Learning, called it an "unfortunate decision" that Wales is not following England's example. "However, if you are going to do it at primary level it needs a huge amount of investment," she said.
Wales is already a bilingual nation with Welsh compulsory to the age of 16. Language experts promoted the recent revival of the language as positive for the learning and teaching of other languages and a "trilingual Wales" vision.
Lord Dearing's review followed concerns in England that not enough pupils were taking languages after they became optional at KS4 in September 2004 because they were seen as too difficult.
About 80 per cent of English primary schools are delivering some form of foreign language teaching.