The Sky Blues chased the 21-year-old attacking midfielder last summer, with Manuel Pellegrini having coached him during his breakthrough at Malaga.
However the Chilean was unable to persuade him to follow him to England as Real snapped him up as a part of their big spend last year.
But, Isco is believed to be unsettled at the Bernabeu already.
Despite making a fine start to the campaign, the youngster has lost his starting berth under Carlo Ancelotti thanks to the form of Gareth Bale and the re-emergence of Luka Modric.
Isco is said to be considering his options, which has alerted Pellegrini.
The City coach is known to be a massive fan of the silky passer, and is desperate to bring him to the Etihad Stadium to be a part of his starting XI.
It has been suggested that Real may look to push a swap deal involving Sergio Aguero, but Pellegrini is not open to such a proposal.
AC Milan are also keen on Isco.