Kilgallon is out of contract at the end of the season and has rejected the offer of an extension with the Championship club.
"It is a fait accompli that 'Killa' will be going," said Blackwell in the Yorkshire Post.
"He spoke to (chief executive) Trevor Birch, but we can't reach an agreement. At the moment, this club is not in a position to offer outrageous terms to anyone. We can't afford to pay the terms we used to.
"With the interest that has been shown, it will be difficult to keep him. There is significant interest from a few Premier League clubs now as well as one or two in the Championship."