"The circumstances that saw him leave were difficult. We didn't want to see him leave but he had a contract due to expire and the chance to go and play in a promotion campaign.
"Craig understood the situation all along but he's a very good player who we're delighted to have back."
The Derby Telegraph says it is understood City will pay a fee for Fagan's services between now and the end of the season.
That sum will then be deducted from a permanent fee in the summer, with £700,000 expected to secure his long-term signature.