But Jones is now set to take over from Hong Kong director of rugby Dai Rees and sign a deal until the end of the season.
Dragons coach Paul Turner said: "Lyn's representatives are pretty close to sorting something out. We agreed a deal before Christmas and it will be signed this week.
"He was a winner with the Ospreys and we hope that will rub off and bring something extra to us."
Jones guided the Ospreys to glory during his five-year stint at the Liberty Stadium. The former Wales flanker won two Magners League titles as well as last season's EDF Energy Cup before he was axed in May following their shock Heineken Cup quarter-final exit to Saracens.