Palacios is now a big-money target for Manchester United and McLeish told the Birmingham Mail: "I didn't know a lot about Palacios and maybe when he did return to training, he wasn't at his best.
"He came back from home, a very traumatic experience with his brother's kidnapping, and had lost some fitness. My intention in January was to bring in experienced Premier League players, or those who had proven quality to make us better at this level.
"Maybe I was a bit stubborn and a bit ambitious in thinking I could bring in two or three midfielders, plus one or two others to strengthen certain other areas. I went on the Harry Redknapp principle, going along the same game plan he did when he kept Portsmouth up a couple of years ago. But unfortunately I wasn't able to do that.
"We tried to get people like Sean Davis - who, ironically enough, was one of the ones Harry bought for Portsmouth - the boy Teemu Tainio at Spurs. When I saw Palacios here I thought he wasn't bad, he had a good touch, but we definitely didn't see what we've seen in the past few weeks at Wigan.
"Perhaps it was a case of Palacios getting fit, getting used to the demands of the Premier League and the situation with his brother. Maybe I should have taken him.
"But at that time the circumstances meant it wasn't straightforward, I had to make a quick decision and had other targets in mind."