The Eredivisie outfit complained to the KNVB after Connolly made an 11th-hour switch to Selhurst Park from Feyenoord, after rejecting a move to AZ.
AZ claimed that Connolly`s verbal agreement was binding and were seeking £3 million compensation, but the arbitration committee of the KNVB has ruled against the Alkmaar club.
Uefa had already rejected AZ`s claim, and the KNVB have simply followed suit.
Connolly, who scored for the Republic against Cyprus at the weekend, is now free to concentrate on his Wimbledon career, but he is suspended for Saturday`s clash with Crystal Palace, their Selhurst Park landlords.