The Times has today published more extraordinary extracts from "My Life in Football", Keegan's forthcoming autobiography.
Keegan returned to manage the club for a second time a decade ago.
However, he resigned after then-executive director (football) Dennis Wise brought in players – striker Xisco and midfielder Nacho Gonzalez – without his approval in the summer of 2008.
Wise asked Keegan to watch clips of Gonzalez, who went on to play 38 minutes of football for the club.
"Dennis Wise rang to ask me to go online and check out Gonzalez," said Keegan. "Dennis said he had heard great things but admitted he had never actually seen him play. Further enquiries revealed that nobody, in fact, from Newcastle had ever seen this guy kick a ball.
"When I rang Dennis to explain it was out of the question, he seemed determined to change my mind. Gonzalez, he said, was a 'great player'. He was adamant we should give him a go and suggested that if I clicked on YouTube I might find some footage to change my opinion.
"YouTube? I came from an era when managers chose players on more than a few carefully edited clips on YouTube. I wanted to know a player’s character. I wanted to see how hard he worked, whether he had a good positional sense, what his concentration was like. Those were things you didn’t get from 60 seconds online.
"I couldn’t believe what I was hearing from Dennis – an experienced football man – but I did log on to YouTube and eventually found a short video showing Gonzalez’s career highlights. It looked as if he was playing in a local park in some of the games.
"Xisco alone was costing Â£5.7million as well as a salary of Â£60,000 a week. Gonzalez had been offered a lower salary, at Â£26,000 a week, but that still worked out close to Â£1million over the season."
Keegan claims that Wise told him the deal for Gonzalez was being done as a "favour" to two agents.
"Dennis called it a 'favour'. A favour? As favours go, it was going to cost Newcastle a fortune," said Keegan. "Newcastle were not breaking any rules but it looked terrible, and left us open to all sorts of questions."
Keegan resigned his position and filed a claim for constructive dismissal, which he won.
"I knew there was no way back for me at Newcastle," said Keegan. "Maybe they thought I wouldn’t dare walk away from a Â£3-million-a-year contract but they obviously didn’t know me very well.
"They had made my job untenable and, when I officially announced my resignation, via the League Managers’ Association, I wanted to make it clear to the supporters that I had been in office but not in power.
"After that, I started the long and difficult process of filing a claim for constructive dismissal and preparing to take Newcastle to an independent arbitration panel. Newcastle launched a counter-claim for Â£2million, citing a breach of contract.
"Newcastle were ordered to pay me Â£2million, plus interest, as well as costs, with the panel condemning the club for 'repeatedly and intentionally misleading the press, public and the fans of Newcastle United', noting how the loan deal for Gonzalez 'cost nearly Â£1million in wages for a player who was not expected to play in the first team'."
* My Life in Football is published by Macmillian on October 4