The 21 year old was an integral part of the La Liga side and also helped Spain's Under-21 team clinch victory in the European Championships.
Manuel Pellegrini was thought to be in pole position to once again link up with his creative midfielder but now Real Madrid are confident of hijacking the deal with a £25million bid.
But Manchester City could let their man go to the Bernabeu considering that they have already bought Fernandinho from Shakhtar and also Sevilla's Jesus Navas who are both goal scoring midfielders.
Isco tallied 16 goals and 10 assists in all competitions this season and also made his debut for Spain's national side, coming off the bench against Uruguay in a friendly earlier in the year.