McFadden has been sidelined since August with knee ligament damage and is still some distance away from a return to full training.
The Scotland international, who moved to St Andrew's from Everton three years ago, is out of contract in the summer, but Blues have an option on the deal in their favour which McLeish intends to activate.
"We will not be letting James McFadden leave at the end of this season," McLeish said. "The worst that will happen is that we will be taking up the option (on his contract).''
McLeish is also adamant Blues will not rush McFadden back into action ahead of schedule.
"James has not done any running yet and he would need to do almost a mini pre-season again. James is very positive about coming back but it depends when his knee is fully healed.
"He'll go back and get a check-up, then it will be determined by the specialist if there's a full healing process that has been achieved. James will then start the active work to get back to full fitness - but not before.''