The 28-year-old England international was heavily linked with a move to Anfield last summer but the Reds could not meet Villa's asking price of £18million.
Barry has been offered a lucrative new deal to remain at Villa Park beyond the end of next season - when his current contract expires - but his future has again been called into question by Tuesday's confirmation from Villa that he is in negotiations with Mark Hughes' ambitious outfit.
Villa boss Martin O'Neill has previously said he would be happy to let Barry see out his contract with the Midlanders - but moneybags City are believed to have changed his mind with a bid in the region of £12million.
Barry is believed to have been offered a four-year deal worth around £80,000 a week by City and would link-up in the centre of the park with Stephen Ireland.
He would also be assured of regular first-team football - a vital factor in the build-up to next year's World Cup finals in South Africa.
A Villa spokesman said: "Aston Villa can confirm today that Gareth Barry is in talks with Manchester City."
City are expected to embark on a massive spending spree this summer but the fact that Barry is considering a move to join up with Hughes' side still comes as a surprise.
Barry claimed last summer that his main reason for wanting to leave Villa at that stage was to play Champions League football.
But City have not even qualified for next season's revamped Europa League with Everton, Villa and Fulham claiming the three places for English clubs.
Villa owner Randy Lerner confirmed last week that the club were in discussions with Barry regarding a new long-term deal.
Barry is currently preparing for England's World Cup qualifiers with Kazakhstan and Andorra and was not expected to make a decision on his future until late next week.
But City are keen to strengthen sooner rather than later although Liverpool could again make a renewed bid to sign the player who has made over 400 appearances for Villa in the last 12 seasons.