Chairman John Sim issued a statement revealing the Championship side had “entered discussions with the player regarding his contractual position”.
Rovers signed Goodwillie from Clyde on the January transfer window deadline day.
It was a move which provoked severe backlash due to the player’s background. A civil court case in 2017 ruled the 32-year-old to be a rapist.
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Raith’s women’s team have sought to distance themselves from the club, staff and volunteers have walked out, Val McDermid has withdrawn her support and sponsorship, while First Minister Nicola Sturgeon has spoken out against the transfer.
Aside from a statement earlier in the week which did not placate fan anger, there has been radio silence from the club's board.
However, Sim addressed the backlash to “this very unfortunate episode” and confirmed the player now won't play for the club having missed the midweek draw with Queen of the South due to a hamstring problem.
"I firstly want to apologise wholeheartedly to our fans, sponsors, players and the wider Raith Rovers community for the anguish and anger caused over the past few days," he said.
“We got it wrong.
“In reaching our original decision, we focused far too much on football matters and not enough on what this decision would mean for our club and the community as a whole.
“Over the past couple of days, we listened carefully to the fans who have got in touch and I’m very grateful for their honesty. As chairman, as a board and as a management team, we have all learned a hard but valuable lesson.
“This very unfortunate episode is something that we all bitterly regret and we are now wholly committed to making things right. I can therefore confirm that, following a meeting of the Raith Rovers board, the player will not be selected by Raith Rovers and we will enter into discussions with the player regarding his contractual position.
“We share a desire to do what is best for our club and will be doing everything in our power to regain the trust and confidence of the Raith Rovers family.”