The Scotsman was playing the ninth hole when Mr McGregor, affectionately known to friends as "Mac", collapsed on the fairway yesterday. He was later pronounced dead.
Forsyth admitted it was one of the toughest things he has ever experienced and spoke in glowing terms of the Zimbabwean.
"Everybody is in shock," said Forsyth. "To see that happen to someone in front of your eyes - I don't know how or when you get over that. Myself and playing partners Adam (Gee) and Tano (Goya) met Tournament Officials and spoke to George O'Grady (European Tour chief executive) on the phone before taking the decision to play on, because we felt that was what Mac would have wanted.
"He was a guy I've known for 15 years and was very popular among the caddies. Obviously, my thoughts go out to his family at this time. For something like this to happen so suddenly is so sad.
"He's was far too young for this to happen. He was the life and soul of the caddies' lounge and a nice guy who will be sorely missed. I'm absolutely numb."
Mr McGregor, who lived in Annan, was employed by the tour and only began to caddie for Forsyth at the start of the tournament. He is understood to have suffered a heart attack at the ninth hole at Santo da Serra.
The tournament, which had been beset by heavy fog, was put on hold after news of Mr MacGregor's death spread. A minute's silence took place at the clubhouse before play resumed. Scottish golfer Scott Henry later lost in a play-off to Daniel Brooks of England.
Nine-time major winner Gary Player was among those to pay tribute to Mr McGregor on Twitter, saying: "RIP Big Mac. You will be missed. My condolences." Zimbabwean golfer Tony Johnstone tweeted: "Just heard very sad news of passing of my friend Iain MacGregor (Zim Mac) whilst caddying in Madeira. A top man and will miss him. RIP Mac."