The Crystal Palace midfielder underwent a costly medical at Thorp Arch earlier this week and met his new team-mates on the understanding that a deal was agreed and he would become a Whites player.
A United statement said: "We haven't been able to conclude the terms of the transfer to Crystal Palace's satisfaction. The situation is we wanted him on loan for a month with a view to a permanent move but they have not agreed. It could happen in the future if terms are agreed."
There are suggestions that Palace were unhappy with the terms of the deal due to United's precarious financial position, while other sources claim Leeds were unwilling to match Derry's personal demands.
United director Melvyn Levi also sought the opinion of former Tottenham director of football Pleat before finally putting the block on the deal.
The Yorkshire Evening Post revealed that he has secretly been consulted on footballing matters on an ad-hoc basis, despite having no official connection with the club.
Derry's agent Phil Smith is hopeful the deal can still be resurrected. Smith told the YEP: "It's very frustrating for us because the player was committed to coming to Leeds. A deal had been agreed. From behind the scenes there's been another barrier thrown in the way which stopped the deal going through.
"We do have a sympathetic understanding with clubs, but Shaun did his medical and stayed up here for two days. A deal was even re-constituted and then done again for a shorter-term basis, but the rug was pulled at the last minute."
Derry was expected to be on the bench for the game with Watford, but the transfer could be resurrected if a proposed investment deal with a Yorkshire-based business consortium goes through.
Potential investor Norman Stubbs returns to England tomorrow and the cash boost will result in a major boardroom re-shuffle.