That means Douglas will not have the chance to defend the gold medal she won at the 2012 London Games.
Olympic rules limit the number of gymnasts from any one country who can advance to the all around final to two. In today's qualifying event, Douglas' team mates Simone Biles and Alexandra Raisman turned in higher scores as the US women dominated the competition.
"I would have loved to go out there and defend my title, but I'm not disappointed," Douglas said. "It's been an amazing ride."
Since winning the all around gold in London, there have been doubts Douglas could regain her Olympic form. She took a two year break, wrote a biography, starred in a reality TV show, and switched coaches.
She dispelled those doubts today, turning in rock solid performances in all four gymnastics apparatuses: floor exercise, balance beam, uneven bars and vault.
Only Biles, the three-time all around world champion who is appearing at her first Olympics, and Raisman, a gold medal winner in the floor exercise at the London Games, scored higher.
In the all around final on Thursday (local time), a total of 24 competitors will be scored in all four events.
Raisman narrowly edged out Douglas for that honour.
DOUGLAS PROVES HER PLACE ON TEAM
History shows it is exceedingly difficult for gymnasts to win an all around gold twice. It was last done in 1968, by Vera Caslavska of Czechoslovakia.
Douglas will still play a key role in the team competition, where the United States women are favorites to repeat their gold medal win in London. She also qualified as one of eight finalists in the uneven bars competition.
For Douglas, just getting to Rio was not easy, and the decision to allow her onto the five-woman US team was a controversial one.
At the US trials in July, she put in a series of shaky performances, including falling off the beam. She placed seventh overall by points there.
National team coordinator Marta Karolyi selected her for the US Olympic team anyway, expressing confidence that she would shine in Rio.
"I think Gabby just proved that she has a place on this team," Karolyi said.
"I know our decision was very much questioned."
Raisman said it was unfortunate that Douglas would not get a chance to defend her London title.
"I hate the two-per-country rule," Raisman said. "I wish they would change that."
The rule came about to prevent one country's gymnasts from dominating the Olympic podium, as Romania's women had at the Sydney Games in 2000, where they won gold, silver and bronze medals in the all around event.
Gymnast Andreea Raducan of Romania was later stripped of her Sydney gold medal, after testing positive for a banned substance.