The Liverpool boss admitted he was out-priced in the bidding for the former Leeds and Newcastle international.
Benitez said: "Woodgate is a very interesting player. I asked for him because the reports were excellent.
"We wanted to sign him but he was too expensive for our budget. What’s more, he was injured for a long time and that made us think a bit.
"By the time we decided to go for him, Madrid had made an offer we could not match."