The actress was initially cast for the item number in the thriller, before being booted out by the producers in favour of the Hisss star.
Reddy told The Times of India: "More than anything I was disgusted when the news of [the song] 'Laila' going to Mallika was confirmed.
"I am flattered that Priyadarshan thinks that I would have done justice to the song. I also realised that I am an actor first so it did not matter. I don't know Mallika and have never interacted with her.
"But a lot of people who saw the 'Laila' song felt it stood out like a sore. So, in hindsight, maybe it all worked out for the best."
She added: "I am grateful to them for the opportunity. I had fun working on the film and I am glad I got appreciated for my hard work. 'Laila' somewhere left a bitter taste in my mouth. I know I could have done it much better than anybody else in the business."
In April, director Priyadarshan said that he was unhappy with the decision to cast Sherawat.
Reddy has denied that she also had a rift with her Tezz co-star Kangana Ranaut earlier in the year.