Palacios joined the Blues in the summer from Olimpia, initially for the first half of the season, and impressed when handed his first-team chance.
Previous City manager Steve Bruce was hoping to tie up a permanent deal for the player.
Copyright (c) PA Sport 2008, All Rights Reserved.
Do YOU want to write for GiveMeSport? Get started today by signing-up and submitting an article HERE: https://www.givemesport.com/writeforgms