The 27-year-old moves to Deepdale until January 5 and while he is unable to face his parent club in the league this month, he can feature in the FA Cup.
Grayson worked with the Australian international at Leeds and was keen to offer him a chance of regular first-team football after he had been frustrated at his chances with the Robins.
"He is a good passer of the ball, fell out of favour down at Bristol City, and we saw this as another opportunity to bring in a player who will make the team and the squad better," said Grayson.
"We could have gone and got some of the younger ones but when you bring loan players in you want players who are going to affect the 18, if not the 11, straight away.
"I know the player, I know what he's about. I think he's still got a bit to prove, he's had a difficult few months at Bristol City and is trying to get back into the Australia squad, so everything worked and I'm delighted to have got him."
Kilkenny admits his familiarity with Grayson, who he credits for playing him in his preferred central midfield position, was a key reason behind his decision to temporarily depart Ashton Gate.
"I know the manager so when I got the phone call I was happy to take it," he said.
"I know the coaching staff, the manager and the assistant manager and I just wanted to go out and play. Having the opportunity to come to such a great club is something I'm looking forward to.
"He trusted me when I was at Leeds and I played some of my best football and hopefully I can do that here."
- Sports & Recreation