The 22-year old spent time at St Andrew's last campaign and is now back with Brum for the 2013/14 Championship season.
"I'm absolutely delighted to be able to bring Shane in," said Birmingham boss Lee Clark. "It's taken the longest of all the deals but he was one I wasn't going to give up on.
"He did really well for us last season and I'm sure the fans are very happy to have him back.
"I think it will be good move for him playing week in and week out, which he hasn't really done at a first-team level, because he'll get stronger and stronger.
"I've also want to thank my old club Newcastle who have done really well for us in terms of the way they've structured the deal financially for us."