City sold Palmer, 21, to Chelsea for £42.5m on deadline day in September.
Palmer has gone on to score 20 top-flight goals and is level with City’s Erling Haaland at the top of the Premier League Golden Boot standings.
“In pre-season I said stay because Riyad [Mahrez] has gone and he said ‘no, I want to leave’,” said Guardiola.
“After two seasons, what could I say?”
Palmer scored four goals against Everton on 15 April to take his league tally to 20 for the season and is set to face his former side in their FA Cup semi-final on Saturday.
He is being tipped to win the PFA Player of the Year award and also make England manager Gareth Southgate’s Euro 2024 squad.
His exploits have raised questions about Guardiola’s wisdom in letting Palmer go.
The City boss claims the reality of the situation meant it was impossible to keep him.
“He was asking for two seasons to leave,” said Guardiola. “I said ‘no, stay’. What could we do?”
Palmer signed a five-year City contract in 2021.
At that point, he had made two senior appearances for the club.
He had only started three Premier League games when he left and Guardiola accepts it was probably not enough.
“I said many times, I didn’t give him the minutes that he maybe deserved and wanted, the minutes he now has at Chelsea,” he said.
“I understand that completely. I am happy for him because he is a lovely guy. He is playing good and is an incredible threat.”
Chelsea boss Mauricio Pochettino says he thanks City for allowing Palmer “the opportunity to him to move to another club” and the forward is also grateful to his former club.
“He always talks very highly about them and Pep,” said Pochettino.
“I think he understood perfectly that maybe for different reasons he wanted to prove himself in another club.”
Pochettino also stressed the need to be “careful” with Palmer considering his rise to prominence this season.
“Because is scoring, maybe he needs to pay attention in different things with things he maybe did not pay attention [before],” said the Argentine.
“That is going to have an influence on how he is going to prepare, how he is going to rest, how he is going to sleep, how he is going to spend the energy that sometimes before he didn’t spend.
“That’s why we need to be careful. We have the experience to manage this type of thing when a young kid becomes a big star. Maybe he is tired, yes because his life changed.
“He needs to learn from the experience.”
