Manchester City boss Manuel Pellegrini is gutted over his double transfer blow.

The Daily Mail says Pellegrini has suffered a setback on his first day officially in charge of Manchester City after he conceded defeat to Real Madrid in the chase for Spain Under-21 star Isco.

It was hoped that Pellegrini's relationship with Isco at Malaga over the last two years could sway the player towards City, but the opportunity to stay in Spain proved decisive in Real clinching a £24million deal.

Pellegrini is also ready to call off City's pursuit of Napoli's £54m-rated striker Edinson Cavani, a long-term target for predecessor Roberto Mancini, and give Edin Dzeko a second chance at the Etihad.