The 20-year-old forward has made only three appearances for Nigel Pearson's side since making a season-long switch to the King Power Stadium.
And United have opted to take Powell back to Old Trafford following a disappointing spell with bottom-of-the-table Leicester.
Leicester stated on the club's official website said: "Leicester City would like to thank Nick for his contribution during the last four months and wish him well in the future."
Powell joined United from Crewe Alexandra in June 2012 and was loaned out to Wigan Athletic last season.
The England Under-21 international has made only two Premier League appearances for United as a substitute in the 2012-13 campaign.
'People will remember us because we got to No.1 in the world rankings and achieved great things - but our biggest regret is that we didn’t win anything': Ex-Everton star Kevin Mirallas opens up on 'honour' of being part of nation's golden generation
‘I’m sure we’d have finished in the top four or five if he hadn’t joined Chelsea in January. Him leaving damaged the team, but we couldn’t stand in his way’: Alan Curbishley reflects on failed Champions League dream after selling key player
