The 26-year-old has played in only 10 matches this season, starting just four.
Nottingham-born Derry also played under Blackwell during their time together at Sheffield United.
He began his career as a trainee at Notts County, moving on to Sheffield United in 1998 for £700k and was signed by Portsmouth in 2000 for £300k before a £400k switch to Selhurst Park in 2002.
"Our paths have crossed, so I know he represents a strong signing for us," confirmed Blackwell.
"He brings experience of having won this division, in which he is a known competitor, while he is also powerful, strong and at 26 going on 27, he is coming up to the right age for a midfielder.
"I know he will give everything for us, which is why I'm pleased we have beaten off good competition in Ipswich and Nottingham Forest to sign him."