Mackay was interviewed for the role along with former Tottenham manager Tim Sherwood at the weekend and was thought to have impressed chairman Steve Parish.
Bookmakers suspended betting on him being chosen on Tuesday and the former Cardiff manager was said to be confident of landing the job.
However, Palace appear to have since performed a U-turn on the decision and talks have broken down.
In further developments it is our understanding that sporting director Moody's position at Palace has become untenable.
Moody is an ally of Mackay's and worked with him at Watford and Cardiff before joining the Eagles.
The situation appears to have been complicated by the involvement of the pair's former club Cardiff.
It has been revealed that the Bluebirds last week handed a dossier to the Football Association which charters Mackay’s time in the Welsh capital.
A Crystal Palace source would not elaborate on Wednesday's events but told Sky Sports New HQ reporter Amy Lewis: “This is the darkest day in the club’s history.”
Cardiff, Mackay, Moody and the FA have all declined to comment.