The culture department was keen to preserve the ancestral home of the legendary actor and convert it into a heritage site, reported Dawn Tuesday.
The house is located in Mohalla Khudadad near Qissa Khwani Bazaar. A dingy building, it located at the end of a narrow street.
The authorities have been planning since February this year to buy the house where Dilip Kumar was born in Dec 11, 1922.
Yusuf Khan, who later took on the name Dilip Kumar, stayed in the house till the age of 12 before moving to Mumbai with his family.
The plan was also to bring Dilip Kumar's personal belongings to the house from India to put it on display for visitors. A library of his films was also in the works.
But the plan hit a roadblock as government failed to buy the house as there were many claimants to the property.
"Now there are legal complications and till the time the rightful owner is not known, the directorate would not go ahead with the plan, " Culture Director Pervez Khan was quoted as saying.
The building is now being used as a warehouse.
The media report said that chances of getting old houses of Bollywood stars Shah Rukh Khan and Raj Kapoor, also located in Peshawar, have gone down.
"The extended family of Shah Rukh Khan is living in his ancestral house whereas a local family owning Kapoor's house is not ready to sell it to the government, " Pervez Khan said.