City have already had two offers of £15million and £18million rejected for the England International, with Toffees boss David Moyes adamant he will not sell any of his star players this summer.
The former Wolves man then tried to force a deal through by handing in a written transfer request which was swiftly rejected. Lescott was then dropped from the squad and forced to train on his own after Moyes became unhappy with his attitude.
That seemed to pave the way for a big money move to Eastlands but City boss Hughes confirmed the club are yet to make a third bid and are prepared to walk away from the deal.
Hughes told Sky Sports: "I've said time and time again that we've made bids for Joleon Lescott and they've been rejected by Everton, who are very much within their rights to do that.
"I respect that decision, that's the top and bottom of that."
Hughes added: "I've said time and time again it comes to a point where sometimes you think it's not going to happen and you walk away from situations, and that's what we've done."
Hughes' comments were originally taken to mean he has already ended his interest in Lescott, but it appears he was referring to previous failed offers for players.
Moyes has been linked with a number of centre backs in recent days, including Newcastle's Steven Taylor and Arsenal's Phillipe Senderos. But those deals could be in doubt if Lescott is forced to stay at Goodison Park.