The English Championship side have decided to invoke a clause to take him back to St Andrews in the current transfer window.
The 28-year-old – out of contract in the summer and a possible target for League One promotion chasers Sunderland – will finish training with Killie this week and has been told by Blues boss Garry Monk to return and train with his parent club on Monday.
It is a major setback to third-placed Kilmarnock, who are just one point behind Celtic and Rangers.
Stewart had been one of the Premiership’s shining lights in the first half of the season.
The former Dundee striker scored eight goals and created the same again in his 16 appearances at Rugby Park.
With City struggling financially and having to operate under a transfer embargo, the door looks set to open again for the Scot.
But the Blues may also look to sell him now rather than lose him for nothing in the summer.
Birmingham’s restrictions mean they cannot sign any new players on a contract over £10,000 a week.
And the boss admits the club are struggling to land targets.
“We have not made any headway at the moment, we are working extremely hard on that side of it,” Monk said.
“We are looking for an option and I said all along it has to be an option that’s going to help us.
“As you can understand with the restrictions we have in that type of market it’s a difficult one. At this moment there is nothing imminent or concrete.
“Hopefully we can find a solution, that’s what we are working for on a daily basis.
“Attacking wise we would like an attacking option if I am honest just to help that side of it.
“But it does seem to change week to week with where the squad is at.
“You have got to understand what we are competing against and what other clubs can offer from a business point of view.
“Not from a football point of view but business wise clubs can offer a lot more than we can. It’s a difficult market.
“We have tried to go down the line with a few but from a business point of view it’s not quite what other clubs want.
“That the unfortunate bit for us, we are where we are with the restrictions but we will keep working away and if something comes along we will try to do it.”