Boyd arrived at Forest on Thursday morning but the transfer collapsed at the 11th hour over what Peterborough described on their official website, theposh.com, as an "inconclusive eye test."
The two clubs had agreed a fee and personal terms had been agreed with Boyd, who had a loan spell with the Reds towards the end of the 2009/10 season.
It is understood that Forest boss Alex McLeish still wanted to press ahead with a permanent transfer but the club's owners, the Al-Hasawi family, were willing only to sanction a loan deal.
Peterborough's director of football Barry Fry exonerated McLeish for what happened and laid the blame firmly at the door of the Al-Hasawi family.
He said: "Alex has been a gentleman over this, it was the owners who pulled out and they are a disgrace to the game. I don't know how they can call themselves fit and proper.
"I can't understand why they called it off 12 hours after his medical and after Alex spent three weeks trying to get the player.
"We've never had any problems with George and he's in bits. Alex still wanted to do the deal but the owners said no.
"Alex has been having rows with them for a couple of days about transfer targets. I wouldn't be surprised if he walked over this."
Rumours did circulate last night that McLeish was so furious with the lack of transfer activity at the City Ground that he had resigned.
However, McLeish today denied he had fallen out with Forest chairman Fawaz Al-Hasawi.
A statement from McLeish on Forest's official website read: "Fawaz is a strong individual, he is the owner and isn't a successful businessman for no reason.
"Sometimes he will say no to my requests and suggestions and sometimes I will say no to his because I am a strong manager.
"If that's the level of the alleged 'bust-up' then I guess we'll be reading about more managers having them with their owners this week."
Posh chairman Darragh MacAnthony pilloried Forest for pulling the plug on the move little more than two hours before the transfer window deadline of 11pm.
He told Sky Sports News: "Forest have been chasing George for a few weeks. Their manager was very keen but they made offers that were not good enough.
"But we accepted an offer from Crystal Palace and Forest matched the deal. We gave George permission to speak to both clubs and he agreed terms with Forest.
"He went there for a medical and had been there all day. I then had a phone call from him and he was in bits. They made him do an eye test and the doctor said he had a problem with one of his eyes.
"George has played 300-plus games for us and has scored a few goals from the half-way line. But he has been told that he has a problem with one of his eyes and, for that reason, the Forest owner did not want to do the deal.
"The whole thing stunk, to be honest. McLeish wanted to do the deal but they came back and asked if they could take him on loan. It is the most ridiculous thing that has happened in my life.
"The whole thing has just been a shambles. This is the same player who passed a medical with Forest when he was there previously on loan.
"He has had this eye issue since he was a boy and it has never been a problem at any of the clubs he has been at.
"When they came back asking if they could have him on loan, I thought 'Forget about it'.
"The whole thing is disgusting. George has been treated terribly. I am disappointed for the boy. I can't get my head around it."
Boyd will be out of contract at the end of the season and the collapse of the deal with Forest could have seen Peterborough's prized asset leave London Road on a free transfer in the summer.
However, MacAnthony revealed that there is already a deal in place with another Championship club.
"I have told him that we would be delighted to give him a new contract but we have had a phone call from a bigger club in the Championship, who have a better chance of promotion and are run by some good people," MacAnthony said.
"They want to sign him when the loan window opens on February the 8th or 9th and they are not worried about his eyesight."