Sanchez was on the verge of joining City last summer but Arsenal pulled out of the deal after failing to sign a replacement in time.
City and Pep Guardiola’s interest in the Chilean didn’t diminish over the first half of the season and it was expected that the deal would happen in January or in the summer when the 29-year-old can be signed on a free transfer.
But Manchester United and Jose Mourinho have made a last-gasp move for Sanchez and put together a financial package which surpasses what City are willing to offer.
It is understood City are not prepared to match their Manchester rivals and are happy to let United capture Sanchez.
The Premier League leaders have offered £20million but Arsenal are demanding £35m – excluding agent fees.
It is claimed Sanchez will have to lower his wage demands if he wants to move to the Etihad.
Earlier today, Arsenal boss Arsene Wenger all but confirmed Sanchez can leave the Emirates if a replacement can be found.
He said: “Yes. Look, it’s the case now. You sum it up very well.
“A bidding war is always beneficial to the club who can take advantage of it.
“We are not in that. I maintain what I’ve said many times. Normally, he should stay here until the end of the season but we’ll see.
“It’s not that I don’t want to inform you, I don’t want to give you wrong information and at the moment I must say nothing is decided one way or the other.
“I don’t question Alexis’ passion. When he’s on the football pitch he wants to win, he’s committed.
“I had many conversations about him and we talked about the fact that people are always observing you with a microscope when you’re on a short-term contract, but I’ve never questioned his professional attitude when he’s on the football pitch.
“Alexis wants to win. When he shows frustration, it’s because we didn’t win.”
Guardiola himself was coy about a deal for his former Barcelona player Sanchez when asked about him today.
“Everyone knows the quality of Alexis but I’m sorry I can’t answer about Alexis and other players,” he said.