Bruce is livid that City made an enquiry for Palacios last Friday week, just hours before the clubs faced each other in a Premier League game, which the Eastlands side won 1-0.
He claims Mark Hughes’ club had no intention of signing the midfielder but wanted to use him as a bargaining chip in the battle with Tottenham to land West Ham’s £12m Bellamy.
Bruce said: "Manchester City’s behaviour was disgusting. They had no intention of signing Palacios. They used the boy and this club as a weapon in a deal to get Craig Bellamy.
"If City had not come in before we played them he would have signed for us. He was wobbling about Spurs. But City never had any intention of signing Palacios and it unsettled him.
"The call came in, chief executive to chief executive, and it cost us the player. He wasn’t sure about going to London, he was on the verge of signing and we had even drawn up the papers.
"But when City came in it was a different ball game. They were throwing telephone figures about. We were told they would speak to us after our game but they had no intention of doing it.
"I think it was done between the clubs. I think it was agreed for Tottenham to pull out of the Bellamy deal and leave City with a clear run for him and Spurs would take Wilson.