Dyer, 28, seemed set for a switch to Upton Park after the Hammers had agreed a fee - believed to be £6million - for the England midfielder.
But West Ham boss Alan Curbishley insisted to his great frustration over the weekend that the deal was now "definitely off".
But Magpies boss Allardyce said: "If Curbs started it, then we are more upset than they are, that is a fact.
"Why? That is confidential. He is not as upset as we are about West Ham.
"In the end, we decided he was undervalued. We escalated the valuation to what we thought was realistic and West Ham did not want to roll with it.
"Kieron is back with us, a top player with a squad who are growing. Will it be difficult for Kieron? It's life, isn't it? He has got a contract. You sign it. The length of the contract means you are employed by an employer, something happens, it doesn't work, you come back and get on with it.
"If anything else happens in terms of West Ham increasing their offer, then great. If they don't, then clearly they don't value him as highly as we do."