Furlong, who has agreed a four-year contract, found himself edged out at Stamford Bridge, initially by Mark Hughes and latterly by the arrival of Gianluca Vialli.
Trevor Francis, who has spent pounds 2.17m since succeeding Barry Fry as manager, described Furlong as a goalscorer with an exceptional left foot and a team player, "the type supporters can relate to because of his efforts on the field".
Furlong follows Steve Bruce, Barry Horne and Gary Ablett on to the players' list at St Andrews, while Peter Shilton and Bob Latchford have been added to the backroom staff. However, the spending spree is now over. "I feel I've got a competitive squad, but it is slightly large and if there were enquiries one or two people might leave," Francis said.
Birmingham's previous record fee was pounds 800,000 which they twice paid for Kevin Francis and Ricky Otto.
The Portuguese Rui Costa will not be joining Arsenal, but manager Bruce Rioch has moved to make his first summer signing by offering Blackburn Rovers pounds 3m for Tim Sherwood. The Gunners' approach for the 27-year-old midfielder was discussed by Rovers' owner Jack Walker, the chairman, Robert Coar and the manager, Ray Harford, yesterday.
Sherwood, who won the Premiership during six seasons at Blackburn but attracted fans' displeasure during the last campaign, is ready for a change. He also has a house in the Hertfordshire town where Rioch lives.
The former Rovers goalkeeper, Bobby Mimms, is being offered the chance to help Bradford City settle in the First Division. Mimms has not found a club since being released and is training with York City.
Derby County have handed over pounds 500,000 to Dundee United for the midfielder Christian Dailly. The Scottish Under-21 international, who was out of contract, could cost twice that depending on appearances and whether the 22-year-old plays for the senior Scotland side.
Dailly, who has signed a four-year contract with the Premiership newcomers, joins fellow new arrivals Aljosa Asanovic, the Croatian midfielder, and the Danish defender Jacob Laursen.
Robert Simpson, the former Tottenham striker, broke a leg and dislocated an ankle less than 24 hours after signing for Portsmouth. Simpson, 20, will now be out of action for at least six months.
"I feel desperately upset for Robert. He had looked sharp in training and I reckoned I had got a bargain for nothing," Terry Fenwick, the Pompey manager, said. "He jumped for a high ball and came down on it awkwardly."
Newcastle have been given permission to make a bid to build a 65,000- seat stadium in the city. Residents, who object to the complex being built near their homes, demonstrated outside Newcastle Civic Centre as councillors arrived for a meeting on Monday night. However, the proposal that Newcastle should be invited to seek planning approval to build in Castle Leazes Park was approved.
Newtown's captain, Colin Reynolds, had the day off yesterday to prepare for the visit of Skonto Riga - known as "Latvia's Milan" - in the Uefa Cup preliminary round tonight.
The 26-year-old builder, who plays central defender with the League of Wales club, said: "I can't go out and lay 1,000 bricks and then play in a match like this. I would be exhausted."