The Honduras international had been heavily linked with a move to the Premier League new-boys after a frustrating spell at Stoke City.
Bruce has been actively chasing reinforcements following the club's promotion from the Championship, with Ahmed Elmohamady and Danny Graham both joining from Sunderland.
While adding Palacios to his ranks looks unlikely due to the change of manager at Stoke, Bruce will widen his search for new recruits.
"I think it's drifting further away," he told the Hull Daily Mail.
"There's been a change of manager at Stoke and if Tony Pulis was still the manager I'd think there would have been a deal to be done.
"I'm not so sure they want to let him out. If that's the case we'll move on.
"Of course I'd be interested but if he's not for sale, he's not for sale."
With Corry Evans and Tom Cairney leaving for Blackburn Rovers on Friday, Bruce knows he needs to give Robert Koren, Stephen Quinn, David Meyler and George Boyd more midfield support.
"We're looking at least two midfield players now, possibly three," he added. "This [selling Evans] has put a little bit in the coffers.
"I've said repeatedly that we'll deal sensibly and we'll be patient to make sure we get the right player.
"We've got a month before the window shuts.
"If it takes us to the last day, it takes us to the last day. But rest assured, we're working hard to get the right players in."