The Italian club want to sign Tevez and also have their eye on a summer swoop for Balotelli.
To get the £45million needed, the cash-strapped Italian giants must sell Brazilian front man Pato.
Milan vice-president Adriano Galliani insisted Tevez has told City he only wants to join Milan, though reports in Italy suggest cross-town rivals Inter are still in the hunt.
Galliani said: "The negotiations are very much alive.
"Manchester insist on a loan with an obligation to buy and we insist on a loan with the right to buy."