"I am staying with the All Blacks. This means too much to me and the people mean too much," said Smith, who was appointed to the New Zealand coaching staff by ex-Lions coach Graham Henry back in 2004.
"I love the jersey, love my country, love the people I'm working with and coaching."
The decision will come as a blow to the Ospreys who had publicly admitted that they had spoken to Smith about the possibility of taking over at the Liberty Stadium.
The EDF Energy Cup holders have been searching for a new coach since Lyn Jones' departure in May of this year, with a club statement explaining that that process is still ongoing.
"Discussions are continuing with potential candidates and an announcement will be made at the appropriate time," said the statement.
"The Ospreys focus is on finding an individual of outstanding ability, professionalism, leadership and innovation with the capability of taking the squad on to the next level, but the region will not rush the process of identifying and securing the right man for this vital and pivotal role.
"Conversations that have taken place with Wayne Smith, amongst others, should however provide an insight as to the thoroughness of the process itself, as well as the calibre of individual the Ospreys are prepared to engage with."
For Smith, the decision to remain in his homeland was far from easy but the resolution of contractual issues regarding time spent away from home, together with a huge amount of pride in working with the best his country has to offer, has led the 51-year-old to believe his choice is the right one.
"I gave it a lot of thought, I had to think quite deeply about it," added Smith.
"It was a family decision. I'd been speaking to (wife) Trish for several weeks over it. Obviously, I had to resolve some of the time away from home issues which I've done with Steve Tew (New Zealand Rugby Union chief executive) and Jock Hobbs (NZRU chairman).
"Ultimately it came down to these fellas here (Henry and forwards chief Steve Hansen), the people I coach with, the management team and the players. "