Rhondda Cynon Taf council said it would meet with residents “to consider potential options”.
“Nothing is off the table, including acquisition of properties where necessary, and we will consult with impacted residents on all future options,” a spokesperson for the council added.
NRW said the topography of the area near the river “presents a challenging risk” and said that during extreme rainfall “flooding can happen rapidly and to significant depths”.
It said the proposed flood defence wall would need to vary along its length between 3.5m and 4.5m (11ft 6in and 14ft 9in) above the road to provide a good level of protection.
NRW said that purchasing the most at risk properties was found “not to be cost-effective to be eligible to receive Flood Defence Grant in aid funding from the Welsh government”.
It said it was “committed to working with the community, the local authority and other partners” to find other solutions.
David Letellier, Head of Operations South Wales Central for NRW, said: “We know how deeply flood risk affects people’s lives and wellbeing, and we understand this will be disappointing news for residents.
“This was a thorough assessment of what’s possible in Ynysybwl, and although we cannot take forward a major scheme at this time, we are not walking away.
“We remain committed to working with the community, the local authority and other partners to explore what else can be done to manage the risk and support residents.”