Dyer had been on the point of moving to Upton Park after the clubs agreed a fee of £5million up front plus a further £1million depending on appearances.
Newcastle then decided they had under-valued the player and demanded a further £2million causing West Ham to pull out of the move.
It is understood the Hammers are still interested in Dyer, who has already passed a medical, but will not go above £6million. They may, however, be willing to pay all the money up front.
Dyer himself has been left in limbo with Newcastle making it clear they were happy for the midfielder to leave.
West Ham were furious with the sudden price hike - they had been given written confirmation of the acceptance of their offer until Newcastle's change of mind.
The club are also keen to make a point that they will not pay over the odds for any player - they want to stress that the Icelandic consortium who own the club will not spend unnecessarily.
Newcastle manager Sam Allardyce has defended the club's decision to block Dyer's move, while West Ham boss Alan Curbishley has insisted the deal was now "definitely off".
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 under-valued. 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."