Whether that kind of deal makes sense for either party is up for debate (personally, I think SoundCloud has priced itself out of Twitter's league with its latest funding round, which reportedly valued the company at $700 million) but it's worth noting that interest sometimes means just that.
SPIEGEL Online weighed into the matter this morning (in German), reporting that Twitter was indeed interested in buying SoundCloud, but has decided against an acquisition - at least for the time being.
Citing the good old 'sources familiar with the matter', SPIEGEL Online claims Twitter definitely considered buying the company, but its report suggests not holding your breath until it happens.
The reasons for the breakdown of the talks were not shared or published.
UPDATE: The Wall Street Journal came out with later report, citing sources saying Twitter balked at the asking price because "the numbers didn't add up".