Blues announced on Monday that they had agreed a fee for the Egypt international, subject to him obtaining a work permit.
But now the move has been shelved by the midlands club and follows on from the collapse of the deal to sign another Tottenham player, Ghaly's compatriot Mido for £6million.
Birmingham, in a media statement, would only say: "Birmingham City Football Club can confirm that they will not be proceeding with the transfer of Hossam Ghaly from Tottenham Hotspur due to footballing reasons."
Blues manager Steve Bruce was unavailable to explain the reasons behind why the plan to sign 25-year-old Ghaly had been abandoned.
It remains to be seen whether he remains at Spurs or is the target for another club.
Ghaly spent three years with Feyenoord before he moved to Spurs in January 2006. He has so far made a total of 34 appearances for Spurs and scored three goals.