"I've said it before, I think it's a mistake when you look at the quality of the field here," Hoy said.
"Today and yesterday, in terms of strength and depth and the quality of the field and the closeness of the racing, it was probably the best ever sprint competition.
"It's a shame that you've got, of the riders who made the last eight, four [who] won't be at the Olympic Games. And of the top 10 qualifiers, five athletes won't be at the Olympics."
The riders who finished third, sixth, seventh and eighth at the world titles will most likely not be able to compete in the sprint at the Olympics.
Hoy said the rule, imposed by cycling's governing body the UCI at the behest of the International Olympic Committee, would not work in a sport like athletics.
"You've got to imagine the 100m final in the athletics with one Jamaican, one American," he said.
"I believe the best athletes in the world should be there, whatever country they're from. Whether it's four guys who make the last four from the same country or whether it's athletes from different countries."
Hoy and Kenny took the gold and silver in the sprint at the 2008 Olympics, but whoever misses the individual event in London, will still be part of Britain's three-man team sprint.
-AAP