The International Olympic Committee voted Sunday to put wrestling back on the roster. Squash trailed in third place, winning 22 votes out of 95 cast, behind 49 for wrestling and 24 for baseball/softball.
Khan, who set a record of 10 British open titles in 1991, said he would not be deterred from fighting hard for squash.
"I have been very passionate about squash's inclusion in the Olympics, so the decision is not only surprising but also shocking," Khan told AFP.
"But we will not lose hope and will continue the fight."
Khan, who won six world titles and had three stints as president of the World Squash Federation, said his sport had come the closest yet to being inducted into the Olympics.
It has been a disappointment for squash fans. In 2005 the sport topped the vote but failed to get the required two-thirds majority. It failed again in 2009.
Khan said squash had everything needed for the Olympics.
"Squash meets all the demands of an Olympic sport, we have a big audience and as a global sport it has its importance," said Khan.
The decision was a blow to "millions of youth who play squash with a passion and want to win an Olympic medal, but I am sure they will continue with this dream", Jahangir added.
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Squash is an International sport which has been featured regularly at the multi-sport events like Pan American Games since 1995, Commonwealth Games and Asian Games since 1998. International Olympic Committee (IOC) should include it in future program for Olympic Games.