This article is from the Tolkien FAQ, by William D.B. Loos loos@hudce.harvard.edu with numerous contributions by others.
No definitive answer is possible, but a several serious obstacles can be
listed. They included:
a) Technical difficulties. Tolkien's unmethodical habits of revision had
made the manuscripts chaotic; it seemed impossible to make everything
consistent. Characters introduced in LotR had to be worked in. Beyond
these detailed questions, he contemplated many alterations, even to
fundamental features of his mythology.
b) The problem of depth. In LotR, his references to the older legends
of the First Age helped produce the strong sense of historical reality.
In the Silmarillion, which told the legends themselves, this method
wouldn't be available.
c) The problem of presentation. LotR had been basically novelistic,
presenting the story sequentially from one character or another's
point of view. But the Silmarillion was and was meant to be a bundle
of tales which had more in common with the ancient legends he studied
than with LotR. He feared that if he presented it as an annotated
study of ancient manuscripts that probably many readers would have
difficulty enjoying the tales as stories.
d) No Hobbits. He feared (correctly) that many people expected another
_Lord of the Rings_, which the Silmarillion could never be.
 
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