The ex-Arsenal star was set for a shock switch to the Santiago Bernabeu, but the proposed deal angered then-boss Juande Ramos.
Pennant was plying his trade with Liverpool at the time, before he leaving the Anfield giants on a free transfer.
A deal was struck with the representatives of the Nottingham-born winger, only for the plug to be pulled by the club at the last minute - with Pennant then heading to Portsmouth on a six-month loan deal.
"I was going to sign a pre-contract with Real Madrid in the January," Pennant told talkSPORT.
"I think the manager at the time was the ex-Spurs manager, Juande Ramos.
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"My agent got the call saying Real Madrid need a right midfielder, and straight away I was like 'what?', 'really?'
"I was like 'I am free, I will do that', even if it meant that I had to sit on the bench.
"That was all okay, they spoke with the president, but it went above Ramos' head, he had no idea about it.
"Once it got to finalising, he was upset that they had gone above him and not told him, obviously doing the deal behind his back.
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"So, he said he was not happy with this, and did not want this sanctioned, and then it did not materialise."
Pennant would eventually end up in Spain joining Real Zaragoza on a one-year deal back in 2009.
After his contract was up at La Romareda, he then joined Stoke on an initial loan deal, before signing permanently and becoming a regular with the Potters.