Blues have already swooped to land Serbian striker Nikola Zigic this summer but boss Alex McLeish was also hoping to wrap up a deal for Miccoli over the coming weeks.
Miccoli has stayed tight lipped while all the speculation has been doing the rounds over the past few weeks but after deciding to stay with Palermo has now broken his silence.
"I've not spoken about my future before because I wanted to weigh up the best options for my family," he told the club's official website. "Looking into president Maurizio Zamparini's eyes convinced me to stay. I'm happy. I'm captain of this team.
"I worked hard to help us secure European qualification and now I want to play in it.
"I want to thank Birmingham for their interest."