Lohan is accused of stealing a $2,500 necklace in January from the Kamofie & Co. jewelry store in Venice.
Los Angeles Superior Court Judge Keith Schwartz never publicly detailed the terms of his offer to Lohan, but said if she pleaded no contest or guilty to taking a $2,500 necklace, he would sentence her to jail.
Lohan refused the deal Wednesday, meaning she will go to trial on the felony charge.
Lohan's lawyer Shawn Holley released a statement Wednesday: "Ms. Lohan has maintained her innocence from the moment this case was filed and she has never wavered. Though many advised her to follow the safe route by taking 'the deal', the truth is, Ms. Lohan is innocent; she has a strong defense; and we are confident that a jury will listen to the evidence fairly and acquit her."
Lohan is now scheduled to return to court on Friday. The actress faced jail time because a guilty plea meant she would be in violation of her probation for a 2007 DUI charge.
The preliminary hearing will be conducted by a new judge - the fourth one Lohan has faced in the past year - who will determine whether there is enough evidence for Lohan to stand trial on the felony grand theft charge.
Lohan has been jailed three times and sent to rehab twice for probation violations. A judge ordered Lohan to do three months of treatment at the Betty Ford Center, and it was within three weeks of her release that she was accused of stealing the necklace.
The store owners of Kamofie & Co. have announced that they will auction off that necklace and donate the proceeds to charity. But the auction will have to wait until after the case is resolved, because the necklace is being held as evidence.
The Associated Press contributed to this report.