Davies, who won 1500m freestyle bronze in Athens and open water silver in Beijing, could only place 38th.
He needed to come home in the top nine to guarantee his place or finish top Brit but team-mate Daniel Fogg was just ahead in 35th.
It means Davies will now focus on the 1500m freestyle in the pool - but the open water was his preferred event and, realistically, his better medal hope.
“I knew that was going to be hard," he admitted.
"I’m not really a fan of swimming in the sea and at times it felt like the whole sea was against me but I did my best.
“I kept seeing Dan in front of me but he got away. If he gets the spot in London, I’ll be there cheering him on.
“I’ve still got the pool swim at my third Olympics and that will be my focus now.”
Fogg, who will also compete over 1500m in the pool, admitted he also found the conditions difficult in Portugal.
But he hopes that he's now done enough to prove he is worthy of another race in the Serpentine, with his place at the discretion of British open water coach Mark Perry and performance director Michael Scott.
“That was a tough race. I didn’t really get into my race rhythm and it felt hard throughout from start to finish," he said.
“I couldn’t respond to the pack when they made a break and I am disappointed with the final result.
“There will be different conditions in London, so if I get selected, I will hopefully get in and race better.”