City moved for the Brazilian midfielder on deadline day, but found themselves priced out of a move for his services, as well as defender Eliaquim Mangala.
Manuel Pellegrini was unwilling to pay £8million for a player whose contract was set to expire in the summer, and had instead hoped to sign him on a free transfer at the end of the season.
However, reports in Portugal suggest the midfielder has agreed a new contract at Porto until 2017.
Pellegrini remains desperate to bolster his midfield options – he was forced to play Martin Demichelis in the midfield during the recent 1-0 defeat to Chelsea – and reports in France suggest he will now turn his attentions to Matuidi.
The 26-year-old has been capped 19 times for France, and is out of contract at Paris St Germain in the summer.
He is not expected to renew terms, and City are hopeful an offer of a four-year contract worth £5million a season will help them see off interest from the likes of Chelsea and Barcelona.