The Blues had agreed a club-record fee to sign the France international, but N'Zogia pulled out at the last-minute because he couldn't agree personal terms.
Alex McLeish: "We did everything that was asked of us and then the goalposts were moved at the last minute.
"It was very important to us as a club to stick to our principals and look after the long-term interests of Birmingham City as we are custodians of the club.
"We remain ambitious and committed to adding extra quality to the playing squad but this deal became one that was not in the interests of the club.
"The Board worked with me extremely hard to try and get this one over the line and I thank them for their support."