A deal was reached after the clubs had found a compromise on a transfer fee, which would have been a minimum of £35 million.
The 25-year-old had been given permission to complete the transfer formalities, including a medical test, in London on Monday, before signing a long-term contract with the Premier League champions.
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But sources have now confirmed to BBC Sport that the deal has been cancelled.
Palace refused to approve the transfer as they encountered difficulties in obtaining a replacement – as goalkeeper Igor Julio opted for a move to West Ham.
They signed Toulouse centre-back Jaydee Canvot on the final day of the transfer window, but Palace wanted to have two replacements in place before approving Guehi’s departure.
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