The Fiorentina striker was left out of Italy's 23-man squad for Brazil 2014 after an injury-hit campaign, with Prandelli worried about Rossi's lack of game time.
Prandelli said he met with Rossi on May 7, days before he announced his 30-man squad, and planned to tell the 27-year-old he had played 'too few minutes' to be considered.
But, wanting to inspire others to fight as Rossi had, Prandelli said he changed his mind.
"My intent was to tell him he was not part of the squad," Prandelli said on Tuesday.
"Then I thought it would have been a beautiful and strong message for all our kids.
"I mean, a player who had been fighting for months, who was so determined to tell me, 'I will surprise you'.
"In that moment I told him twice, 'Giuseppe, you are not amongst the 23, but this could be a good story to tell'.
"I even told him it would have been hard for me to axe him as he's always been behaving in an extraordinary way for 10 years, inside and outside the pitch.
"I didn't have the courage and the heart in that frame of time to be ruthless. I accepted this beautiful challenge instead, though repeating many times, 'Keep this in mind, Beppe… you are not in the 23'."
Prandelli said he was 'surprised' by the negative response from the players left out as even Rossi expressed his frustration.
"Before the last friendly (against Ireland on Saturday) I called him (and said), 'look, we have been looking at your training, there are some good marks and others slightly worse," Prandelli said.
"That is not pivotal, though. I want to see how you move as a striker, the kind of movements a striker does unconsciously after the injury is gone. I want to see them tonight. I want to see a striker, not a midfielder. I know you are technically skilful, one of the best.
"I even sacrificed (Ciro) Immobile to let him play up front. Unfortunately I didn't see what I wanted to see."
