The Premier League's elite have suffered a painful reality check after Pep Guardiola, the most coveted coach in world football, turned his back on a prospective move to England and was confirmed as the next manager of Bayern Munich.

The former Barcelona coach, who is on a year-long sabbatical in Manhattan after leaving Camp Nou last summer, has agreed a three-year deal with the Bundesliga club and will replace Jupp Heynckes on 1 July. A number of Premier League clubs had considered moves for Guardiola at the end of the campaign, principal among them Chelsea, who are under the interim stewardship of Rafael Benítez, though Bayern's speed off the mark has seen those ambitions dashed.

The 41-year-old's decision has effectively thrust José Mourinho, with whom Guardiola endured a fractious relationship in La Liga while in charge of Barça, into a stronger negotiating position should he end up leaving Real Madrid at the end of the season. Though Chelsea are expected to sound out the Portuguese as they seek a permanent successor to Roberto Di Matteo, they could find themselves competing for his signature with money-flushed Paris Saint-Germain and possibly even Manchester City, for all that the Premier League champions retain faith at present in Roberto Mancini.

Guardiola won three La Liga titles and two European Cups, together with two Fifa Club World Cup titles and two European Super Cups, in a glittering four-year spell in charge of Barcelona after replacing Frank Rijkaard in 2008. The 13 trophies won in that time established him as the most successful coach in the club's history. He also has admirers in the hierarchies at Arsenal and Manchester United and had been contacted by Milan and Roma in Serie A, with Bayern's success in luring him to the Bundesliga a considerable coup. "There were contacts with clubs which were close, and others which were put on hold until a decision was taken," said his agent, Josep Maria Orobitg. "He chose Bayern because of all the teams from which he had offers it was the best."

The Catalan will become the highest-earning manager in the club's history – it has been mooted that he struck a separate sponsorship deal with Adidas, Bayern's kit supplier – at around €10m (£8.3m) a year, a figure he might have eclipsed at any of his other suitors, with Chelsea having made their admiration clear last March and in the summer.

Yet Guardiola appears to have been attracted by the similarities between Bayern and Barça, both of whom thrive essentially on bringing players through their youth system and relying on their managers to oversee the first-team set-up, with others charged with recruitment.

Contact had first been made with Guardiola's brother, Pere, last summer when he was approached by Bayern's sporting director at the time, Christian Nerlinger.

That was politely rebuffed, as was the inquiry from Chelsea before the appointment of Di Matteo on a full-time basis, as the coach was intent on enjoying six months with his family in New York before addressing where his future lay. The deal with Bayern was signed before Christmas and confirmed on Wednesday.

"Pep Guardiola is one of the most successful coaches in the world," said the Bayern chief executive, Karl-Heinz Rummenigge. "We are sure that he can make not just Bayern but all of German football shine. We are very pleased that we have managed to convince someone who was coveted and contacted by many top clubs to come to Bayern." Heynckes, who had steered Bayern to a nine-point lead in the Bundesliga at the start of the winter break – in his third spell at the club – had already indicated his intention to retire when his contract expires on 30 June. "Only someone of the calibre of coach Pep Guardiola could be considered an adequate replacement for Jupp Heynckes," said the Bayern chairman, Uli Hoeness.

Although City, United and Arsenal boast respected and established managers at the helm, Chelsea are preparing to re-enter the market for a permanent successor to Di Matteo. The club's support have made it clear they are unlikely ever to accept Benítez, whose record might normally make him a candidate and who is contracted until the end of the season, given his previous ties to Liverpool, though the process of unearthing alternatives will begin most likely after the closure of this transfer window.

Mourinho, whose future at Real Madrid is in doubt, will be considered and the credentials of Michael Laudrup at Swansea, Diego Simeone at Atlético Madrid and Borussia Dortmund's Jürgen Klopp will also be assessed.