Speaking to Movistar + (h/t Marca), the former Los Blancos playing legend was clear the midfielder will stay in Spain.
"There is no issue with Modric," said Butragueno. "He's delighted to continue with us."
Per Marca, Inter have shown significant interest in the player after he helped Croatia reach the 2018 FIFA World Cup final in Russia.
Modric failed to make the starting XI as Real lost 4-2 to Atletico Madrid in the UEFA Super Cup final in Estonia on Wednesday.
However, he remains a central part of new manager Julen Lopetegui's squad, as Real get used to life after the departure of Cristiano Ronaldo to Juventus.
Modric's agent, Marko Naletilic, recently said he believed the 32-year-old would find his way to Serie A.
According to Tuttosport (h/t MailOnline's Joe Strange), the Croatian representative said:
"The fact Inter Milan tried to sign him and Modric took it into consideration shows the influence Cristiano Ronaldo is already having on Italian football. For whatever reason, Modric wants to be a star in Serie A with Inter. Let's see. I believe that sooner or later Luka will play in Italy. Like a lot of Croatians his age, he grew up watching Italian football."
The Italian transfer window is set to close on Friday, and Butragueno's comments will ease fears surrounding Modric's immediate future.
Bleacher Report's Dean Jones said recent events might have affected Modric's chances of a starting berth in the Super Cup:
Modric proved in Russia he is still one of the best operators in central midfield, and his diversity allows him to be deployed as a No. 10 if needed.
Lopetegui will take time to find what is his best starting XI in the weeks ahead, but it's vital Modric is retained for the next 12 months.
Inter are likely to continue chasing until the final moments of the summer transfer window, but Real's reluctance to lose one of their best midfielders should scupper any deal, especially after Butragueno's latest comments.