Manchester City are prepared to abandon their pursuit of Alexis Sanchez and allow the Arsenal forward to move to Manchester United this month because of the escalating costs of completing a deal, sources have told ESPN FC.
United's late interest in Sanchez, with Armenia midfielder Henrikh Mkhitaryan potentially a part of any deal, is being taken seriously by the City hierarchy.
The Premier League leaders value Sanchez at £20 million because the 29-year-old has just six months remaining on his Arsenal contract, and sources have told ESPN FC that City will not meet Arsenal's £35m asking price or agent fees, which amount to £5m.
City had been close to securing the Chile forward in August after agreeing to a £60m deal with Arsenal on the final day of the summer transfer window.
But Arsenal's failure to sign Monaco's Thomas Lemar as a replacement saw the London club pull the plug on the deal, forcing Sanchez to remain at the Emirates.
City and Sanchez's representatives had agreed to personal terms of about £250,000 a week before the move collapsed in August, and sources said a similar pay deal would be in place should he move to the Etihad this month.
But with Arsenal aware of rival interest from United, there is no mood within the Emirates to reduce the price tag.
City accept that Arsenal will not do business on Sanchez until they have signed a replacement, but manager Arsene Wenger has identified Bordeaux forward Malcom, and negotiations to sign the player are progressing.
United's readiness to offload Mkhitaryan also gives the Old Trafford outfit an advantage over City, who have no plans to offer a player in exchange and ruled out using Raheem Sterling as a makeweight for Sanchez back in August.
Sources have told ESPN FC that Sanchez has grown so unhappy and disenchanted at Arsenal that he is determined to leave this month -- a reality that has left City accepting that he might choose to leave for United before the Jan. 31 deadline if he has no viable alternative.
And while City officials say Sanchez wants to be reunited with Pep Guardiola after playing for the manager at Barcelona, they are not prepared to pay what they believe to be excessively over the odds for a player with just six months left on his contract.
Guardiola revealed at his Friday news conference that Gabriel Jesus could return to action in "two to three weeks" after visiting the Barcelona-based doctor Ramon Cugat for treatment on a medial knee ligament injury this week.
And the Brazil striker's quicker-than-expected return to action has eased the need for attacking reinforcements and left the club prepared to wait until the summer to sign Sanchez as a free agent.
However, United's entry into the race to sign the player has forced City to re-evaluate their position.
When asked about Sanchez on Friday, meanwhile, Guardiola refused to discuss the prospects of signing the forward.
"I am focused on Liverpool versus City," Guardiola told reporters. "If I was my players I wouldn't want my manager talking about other things."
ESPN FC's Manchester City correspondent, Jonathan Smith, contributed to this report.