Derbyshire, 24, moved to Greece in January 2009 but returns for a move which could become permanent if he impresses for Alex McLeish's side.
Derbyshire has three years remaining on his contract with Olympiakos.
He could make his Birmingham debut against Blackburn at St Andrew's on Saturday.
As a young forward, Derbyshire struggled to win a regular starting place at Ewood Park and had loan spells with Wrexham and Plymouth before departing to Olympiacos, initially on loan.
It was during the loan spell last year that Derbyshire enjoyed his finest match for the Greek giants, scoring twice in the domestic cup final - including a stoppage-time equaliser - to force a 3-3 draw with AEK Athens before Olympiacos won 15-14 in a penalty shoot-out.
McLeish has been keen to add to his squad this summer after their impressive first season after promotion, and Derbyshire becomes the second striker to join the club after former Valencia frontman Nikola Zigic.