Having already sealed the signing of giant Serbian Nikola Zigic, Blues manager Alex McLeish had set his sights on 5ft 6in frontman Miccoli.
The 30-year-old has just enjoyed a fine season for Palermo, scoring 19 goals to finish third in the Serie A scoring charts.
His performances helped the Rosanero qualify for the Europa League and he will not now be allowed to leave.
Palermo sporting director Walter Sabatini insists Blues were keen to bring in Miccoli and had made an offer.
"Miccoli is not for sale," Sabatini told Rete Rete 24. "A request from Birmingham is real, but we have already said we are not interested, in fact I consider it not to be an issue.
"The player will stay with us next season unless he asks us to leave so he can gain a new experience."
Birmingham's chief scout Paul Montgomery, meanwhile, has revealed that Blues are looking to strengthen their squad early in the summer and have made a number of bids for players already.
"We have put several offers in for players and the manager and the club are attempting to sort out as many as possible before the World Cup," Montgomery told the Birmingham Mail.
"After the finals, the transfer market starts to become inflated, there's a knock-on effect."