"Chris and Jason are on great form and that made it a difficult choice, but we have decided to select Jason to contest the sprint and Chris will concentrate on the keirin," said Dave Brailsford, Britain's performance director. "We believe this gives us the strongest team possible."
It is a blow for Hoy, 36, who has repeatedly said he hoped to repeat his stunning success in Beijing, when he became the first Briton to claim three golds at a Games for a century.
The sprint was the last of his medals - following the keirin and the team sprint - and the man he beat in the final was Kenny. The limit on numbers per nation was changed in the wake of Britain's dominance and now Hoy has become the most high-profile casualty of the rule, a victim - to an extent - of his achievements.
"You accept that the UCI make decisions out of the blue - you expect the unexpected from them," he said. "You've got no control over that - there's no point shaking your fist."
But the decision of cycling's governing body to make changes and the refusal of the International Olympic Committee to allow cycling to expand rankles within the sport.
"There are 14 events on the track - 46 in the pool," Hoy said. "There's often decisions made that I don't think are made for the right reasons and the benefit of the sport. All you can do as an athlete is talk out about it when the decision is made and then get on with it.
"[The UCI] want the sport to be global, they want to encourage other nations to get involved and I do agree with that but cyclists feel frustrated when there are other sports that don't have to take events out to put one in, but in sports like cycling it's one in, one out."
Hoy had entered the World Cup in the London Velodrome this year amid growing speculation that Kenny was overtaking his friend and rival. But when he produced a succession of bullish rides to win the event and also blew the field away to claim the keirin, it appeared a statement of intent. But he said yesterday he was happy with the decision and it would improve his and Britain's chances in other events by lessening his workload.
"It helps me out focusing on two events," said Hoy. "It means I have the chance to recover properly between the team sprint and the keirin, which is a bit of a luxury really. It would have been five days [racing] in a row but now I can give everything to the team sprint and not even think about the keirin. Let the dust settle then prepare for the keirin, otherwise you spread yourself a bit thin."Independent