The News of the World says the Milan coach has signed a pre-contract deal with the Stamford Bridge club for a three-year deal worth an incredible £18.6MILLION tax free.
The Italian flew into London for further talks about his backroom staff last week and his move looked sorted. But since then Milan have dramatically made Ancelotti a counter-offer of a new four-year deal at the San Siro worth £4.4m-a-year tax free - or £17.6m in total.
And Italian sources say they are now increasingly confident he will reject Blues owner Roman Abramovich's offer and stay put in Milan.
Chelsea are so worried about losing their man at the last minute they have demanded assurances from Ancelotti that he is still coming to join them.
A close friend said: "When Ancelotti signed his pre-contract with Chelsea things were not good at Milan. It seemed best for him to move on and so the offer from Abramovich was irresistible.
"But it is not looking so irresistible now as Milan are in fine form. Five wins in a row, eight matches unbeaten and on course for the Champions League.
"The whole mood at Milan has changed. They were talking to technical area manager Leonardo De Araujo about taking over from Ancelotti but not anymore - now all they are interested in is keeping the man they've got. And they feel they are winning the argument.
"Ancelotti likes his life in Italy and is happy and secure at Milan where he has a great relationship with Silvio Berlusconi and Adriano Galliani - warm and friendly.
"He's worried he won't have the same warm relationship with Roman Abramovich and Frank Arnesen at Chelsea. Or the same control as he does at Milan.
"So there are growing doubts in his mind and instead of it being a closed deal it is now 50-50 whether Ancelotti stays or goes."