The former Juventus and Fiorentina striker was interesting Blues this summer, but he has opted to remain in Serie A.
Miccoli remained quiet until now as he evaluated his options and has now confirmed he is looking forward to European football with Palermo.
"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."
Miccoli was happy with Birmingham's willingness to bring him to the Premier League, adding: "I want to thank Birmingham for their interest."