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The fee is believed to be in the region of £200,000.
Devlin returns to Blues four years after leaving St. Andrew's, he made 87 appearances for the club between 1996 and 1998.
Speaking to the Birmingham Evening Mail, Devlin said: "I'm delighted everything is sorted."
"When I signed on loan for the third month I thought I was covered for all the play-off games.
"I didn't know until the gaffer told me after we beat Millwall in the semi-final that unless I was bought, I wouldn't be able to play against Norwich City.
"I'd already joked to him after Thursday that if I wasn't involved then I'd have him shot the next time he was out in Birmingham.
"I didn't realise what the situation was then."
"Until something's done, you never know," he said. "I saw a couple of faxes to Sheffield about the agreement and both the gaffer and Karren Brady gave me their word I would be signed regardless.
"But it's still a relief to get it done and be back here on a permanent footing.
"I don't think I could ask for a better boost before what's got to be my biggest ever game - and probably the club's."
Mangaer Steve Bruce said: "His performances on loan certainly warranted bringing him back here on a permanent basis.
"And I think we all know how much this club means to him. He's a Blue through and through."