The defender, capped 96 times, was overlooked for the Socceroos' last friendly against Ecuador in March after being left without a club since departing J-League club Omiya Ardija in November 2013.
Neill secured a month loan deal with English Championship side Doncaster in late March but Postecoglou felt the 36-year-old would not be ready for a World Cup campaign.
"In the end I just had to make a decision not so much about the recent history but the last six months in terms of form and fitness," he said of Neill, who made his international debut as an 18-year-old.
"There just wasn’t enough evidence there for me to say he’d be able to hold up in a World Cup. It was both a combination of the lack of regular football and the little niggles he got that made the decision for me.
Postecoglou felt it was important to inform Neill personally of the decision prior to the World Cup squad being announced given what he's achieved at international and club level.
Neill broke the Socceroo record when he pulled on the captain’s armband for the 61st time in his last international against Costa Rica.
"I had a conversation with Lucas regarding the World Cup squad and obviously before I announced the 30-man squad next week I thought it was important for me to speak to him directly," Postecoglou told the FFA's website.
"I informed him that he hasn’t made the 30, from my perspective paying due respect to the fact that he’s been the captain for six years and the captain of the World Cup campaign so far.
"It was difficult, he’s worked damn hard to get himself ready and available; he’s shown an enormous determination to go to this World Cup.
"You can see why he’s played for his country as many times as he has and why he was a leader, he’s gone down fighting."
Postecoglou indicated that his decision was purely based on the World Cup.
"My discussions with him were purely about the World Cup and he has every intention of continuing to play on and play next year, probably in Europe," he said.