The Mirror says Gunners boss Wenger is a long time admirer of Balotelli, 23, despite his troublesome reputation during his spell at City where he became one of the Premier League's most colourful characters.
Balotelli, who has scored 30 goals in 54 games at Milan, is keen to return to England after becoming surplus to requirements at the San Siro.
The Italian giants are strapped for cash and want to cash in on him and cut their wage bill after signing him for £24m just 18 months ago.
Wenger has spoken of his admiration of Balotelli in the past, when he was still an Inter Milan player.
"I consider Inter an excellent squad who can do really well in the Champions League.
"In particular I am keeping an eye out for Balotelli, a player I like very much. In my view he can be one of the best."
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