Lara has a contract with Cable & Wireless
Brian Lara has been excluded from the West Indies squad to face South Africa in the first Test starting on 31 March.
The West Indies Cricket Board said Lara had given a "non-committal" response to an invitation to sign a new contract.
A 14-man squad has been chosen and batsman Shivnarine Chanderpaul will lead the team in Guyana.
Six others with personal endorsement contracts, including Ramnaresh Sarwan, Chris Gayle, Fidel Edwards and Dwayne Bravo, have been left out.
The board suggested Lara agreed to participate only if others involved in the dispute were allowed to play.
The statement read: "Lara put a proposition to the board that could not have been entertained because it would require players to be selected who were ineligible due to the nature of their personal endorsement contracts."
Lawyers examining sponsorship contracts had said Lara's did not conflict with the board's agreement with Digicel.
Lara's contract with Cable & Wireless, who until a year ago sponsored the WICB too, was signed in 2003, a year before those of the other players.
"The other six players with personal endorsement contracts Chris Gayle, Ramnaresh Sarwan, Dwayne Bravo, Fidel Edwards, Dwayne Smith and Ravi Rampaul were deemed to be ineligible," said a WICB statement.
Chanderpaul replaced Sarwan as Lara's vice-captain during the recent one-day series in January. A veteran of 80 Tests, he has skippered his country Guyana since 2003.
Wicket-keeper Courtney Browne steps up as his deputy.
The squad have a training camp in Barbados from 23 March before leaving for Guyana on 28 March, three days before the first Test.
Keith Mitchell, the prime minister of Grenada, fears the row could adversly affect the region's preparations for the 2007 World Cup.
"I am concerned by the message we send to the international community about the prospects for a successful World Cup," he said.
"In the case of Grenada, where we have been battered by (Hurricane) Ivan, we need all the message of hope.
"(We need) to send the right message that we are ready to host a World Cup and be very successful at it."
Mitchell, the chairman of the Caricom prime ministerial sub-committee on cricket, has already attempted to resolve the stand-off.
"I hope and pray that common sense prevails because I think we have offered serious advice to the West Indies Cricket Board and to all concerned," he added.
Meanwhile, Digicel have dismissed as "unsubstantiated" claims it could sell its £11m deal to a local company in an attempt to resolve the row.
West Indies squad for first Test against South Africa starting 31 March:
Shivnarine Chanderpaul (Capt), Courtney Browne (Vice Capt; Wkt), Wavell Hinds, Devon Smith, Donavon Pagon, Narsingh Deonarine, Daren Ganga, Ryan Hinds, Corey Collymore, Pedro Collins, Dwight Washington, Daren Powell, Jerome Taylor, Reon King.