Sigurdsson, 23, enjoyed his best-ever season while on loan at Swansea City last term, tallying seven goals and three assists in 18 league appearances.
The 23-year-old was attracting interest from a number of English Premier League clubs, including Liverpool and Tottenham Hotspur, with the Swans also keen on landing the player on a permanent basis.
The Iceland international joined Spurs in July 2012, becoming the first signing for new manager Andre Villas-Boas.
Since arriving in north London, Sigurdsson has struggled to break into Andre Villas-Boas’ first-team, having made just six league starts for Spurs this season.
Despite his lackluster form, the former Reading midfielder has totaled 37 appearances for club and country in 2012-13, netting three goals and six assists, and remains an important player for Spurs, according to AVB.
“Obviously he’s a player that means a lot to Reading,” said Villas-Boas.
“But he’s a player that we rate very highly, we brought him here after his amazing contribution (on loan) for Swansea last year and he’s a player we have high expectations for.
“Probably this season, at the moment, he is not going to the level he wants, but he’s a player that we believe a lot in, and in his future here.
“We couldn’t allow him to leave.”
The Royals may not have completed the signing of their main transfer target, but they did swoop for Hope Akpan (Crawley Town), Stephen Kelly (Fulham) and Nick Blackman (Sheffield United) in January.
Akpan and Kelly have already turned in some fine performances for the club, with the former having tallied three assists in his first two league appearances as a substitute.
Reds agree to sell Carroll to West Ham
According to West Ham United co-owner David Sullivan, Liverpool have reached an agreement to sell England international striker Andy Carroll to the Hammers at the end of the season.
Carroll, who joined Liverpool from Newcastle United for a fee of £35 million in January 2011, arrived at Upton Park on a season-long loan deal in the summer.
Liverpool manager Brendan Rodgers allowed the England international to leave Anfield despite having just two senior strikers, Fabio Borini and Luis Suarez, in his first-team squad, fueling speculation that Carroll had played his final game in a Liverpool shirt.
“I am often asked about Andy Carroll’s deal. It is a season-long loan. Liverpool had an option to take him back in January, but he has been injured,” revealed Sullivan in an exclusive interview with MailOnline.
“West Ham have an agreement with Liverpool to sign him at the end of the season, but we have no agreement with the player.
“It was his desire to come to West Ham to prove himself to Liverpool and that hasn’t changed.
“He has had injuries since he came, but he is back to fitness now and we have 15 games left… we need some goals and some points, so let’s see.”
Carroll, 24, has bagged one goal in 13 league appearances for Liverpool and West Ham United this season.