The report claims that the Premier League outfit are plotting a move for the 21-year-old defender following Ashley Williams joining Everton on a £12 million transfer.
However, per the source, Denayer would favour a move to Turkish giants Galatasaray where he established himself as a first team regular last season.
Arsenal boss Arsene Wenger reportedly wants Denayer to offer cover for defenders Per Mertesacker and Gabriel who picked up injuries over the pre-season.
City reportedly want £12 million for the Belgium international defender but could consider a loan move.
Denayer did not feature in the pre-season friendly against Arsenal in Sweden last week despite Vincent Kompany, Nicolas Otamendi and Eliaquim Mangala all being out and is expected to leave as he is unlikely to play regular first team football at the Citizens.