"Due to scheduling issues, (Lee) would not be able to attend the meeting to represent Hong Kong, China in person," the city's government said in a statement on Tuesday.
The Chinese finance hub is a member economy of the Asia-Pacific Economic Cooperation (APEC) and was invited to attend the summit in San Francisco set for November 15 to 17.
But Lee was placed under US sanctions in 2020 due to his involvement in quelling massive and at times violent democracy protests in Hong Kong the year before.
A bipartisan group of American lawmakers in June called on President Joe Biden's administration to "prohibit" Lee from attending the APEC summit.
Inviting Lee would be an "affront to all those who have been persecuted by the Chinese Communist Party", they added.
The US State Department in June told Congress it would invite Lee before later saying that was an "incorrect version" of its plans that had been "inadvertently transmitted".
Hong Kong on Tuesday confirmed that the city's finance chief Paul Chan, who is not sanctioned, will attend the summit instead.
Hong Kong "has long been participating in APEC as a full and separate member" and will "continue to participate in APEC matters, with a view to contributing to regional economic co-operation", the city's government said.
As security chief, Lee oversaw the crackdown on the 2019 protests that led to more than 10,000 arrests.
In 2020, Beijing imposed a sweeping national security law that has wiped out organised opposition and quelled dissent.
Lee was chosen as Hong Kong's leader in 2022 by a small committee of Beijing loyalists, winning 99 percent of the votes in a race with no other candidates.
Last week, he announced a slew of policy initiatives that included an additional homegrown security law which he said will be passed no later than 2024.
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