Neymar is 15 but has already trained with the Santos first team and is being heralded as the 'new Robinho' - as he is very similar in stature and technique and also comes from the same team.
Real signed a deal in August that runs until June 2011 - but the issue is that they have only signed with the player's representative and nothing has been agreed with Santos.
Despite the huge amount of interest, Brazilian sources claim the battle is a straight fight between Real and United.
Santos, who realise Neymar cannot sign a professional contract until he is 16, have already acted to counter this by finalising a deal for his image rights until 2015. This means they are due £13million if he goes elsewhere.
Real are not too happy about this as they thought they had a deal sealed for Neymar - but now they know they have to agree terms with Santos if they want to secure the player.
Neymar is currently starring in the Copa Sao Paolo - the Copinha, which is the most important junior tournament in Brazil.