Gazzetta dello Sport says Balotelli's agent Mino Raiola and City chief executive Ferran Soriano have failed to reach an agreement over the controversial player.
It is thought Raiola proposed Balotelli join AC Milan on an initial loan move until the end of the season, with the option for a permanent deal next summer.
But City are believed to be determined to remove the former Inter Milan star off their books for good.
Soriano is said to have told Balotelli's representative City believe they have already acted with good faith in knocking-down his price tag to £20m.
And if AC Milan fail to meet their stated fee, Balotelli will remain at the Etihad.