New meets old? Paulo Henrique Ganso could line up alongside Kaka at Real
Manchester United and Chelsea have since emerged as rivals for the 20-year-old, who has a £45million release clause, but his agent says the UK's tough work permit rules mean they are looking elsewhere for a move.
AC Milan have also shown interest as Ronaldinho edges ever closer to the exit, but Real Madrid is the club where Ganso seems most likely to end up.
Sabatino Durante, the agent, said: 'Our first choice, both with regards to the player and the club, is Real Madrid.
'This is not new, because the rules for going to England would require a special request to the FA. All this makes it more complicated.
'In addition, the first team that were interested in Ganso were Real Madrid, who have followed him for more than a year.'
It is not the first time City have hit a setback in their pursuit of Ganso. When their first-option was agreed back in January, the player undiplomatically admitted he wasn't too keen on playing at Eastlands.
'I don't want to play for Manchester City,' he said at the time. 'I'd rather play for a big European club, such as AC Milan, Real Madrid or Barcelona.' Battle of Manchester: United will fight City for 'New Kaka' Ganso's signatureMan City dilemma as Real Madrid enter race for Santos's brilliant GansoMANCHESTER CITY FC