Kotaku cites an alleged inside source claiming the sequel was axed in 2011 because it would have been a "disaster".
Developed by Vicarious Visions, the game is said to have used only a six-string guitar input with an extra button on the neck, and saw players creating music videos.
The source claims that the new peripheral was unresponsive and costly to develop, while budget constraints prevented the studio from securing the rights to a strong song catalogue.
"The game had all of the worst hits from the 1990s," said the insider. "They realised that, with our lack of budget and time, they couldn't get quality music so they bought bargain-basement music like 'Closing time' and 'Sex and Candy'.
"There were some songs in there that had been used at least three times in the Guitar Hero franchises before."
Publisher Activision announced that it was shutting down the Guitar Hero series early last year following declining sales in the rhythm game genre.
Watch a trailer for Guitar Hero: Warriors of Rock below: