A statement from Serbia's top military body, the Supreme Defence Council, said the Council would not allow the use of Serbia-Montenegro army units in Milosevic's funeral.
The proposal to rule out a state honour guard was made by Serbian President Boris Tadic, the Council said.
Tadic said on Sunday a state funeral would be "absolutely inappropriate considering the role Milosevic played in Serbia's recent history".
Milosevic's Socialist Party and the ultranationalist Radical Party initially insisted on a state funeral and burial in the 'Avenue of Heroes' section of Belgrade's main cemetery.
But Belgrade mayor Nenad Bogdanovic said he would not authorise burial in that section, which is reserved for distinguished citizens, including assassinated Prime Minister Zoran Djindjic, who extradited Milosevic to The Hague in 2001.
"Only people who left a positive, noble and humane mark on this city and in our country are buried in Heroes' Alley", Bogdanovic said in a statement.
Milosevic was on trial at the Hague war crimes tribunal on 66 counts of genocide, crimes against humanity and war crimes involving conflicts in Bosnia, Croatia and Kosovo that tore Yugoslavia apart in the 1990s.