Both teams have been locked in talks with Malaga, as Manuel Pellegrini looked to raid his old club for the brilliant young playmaker.
However, it now appears that Real Madrid, despite being without a coach, are set to win the race for his coveted signature.
Speaking to AS, Isco refused to confirm who he would be signing for but did say of Real: "Madrid excites me.
"They are one of the best teams in the world."
It is claimed that Madrid have agreed to a deal worth €30million (£25million), with the possibility of Denis Cheryshev joining Malaga.
As well as City, Isco is also reported to have shunned approaches from Monaco and Borussia Dortmund.
Meanwhile, Sky Bet have suspended betting on Isco's next club after he was heavily backed to join Real.
The Malaga playmaker had been backed at as short as 1/2 to follow Pellegrini to the Etihad Stadium but the recent money has predominantly suggested he will sign for the Spanish giants.
The online bookmaker saw the Spaniard backed at as short as 1/8 to join Real Madrid before suspending betting.
Sky Bet Football Trader Chris Spicer said: "It has been a see-saw market with City and Real exchanging favouritism, but things have become very one-sided over the last 24 hours with the money and media implying he will sign at the Bernabeu.
"It also raises the question as to where City will turn next in the transfer market with Edinson Cavani, who had also been backed to arrive at the Etihad Stadium, also seemingly favouring a move to the Spanish capital."
Source: Manchester City MAD