The Argentina international has confirmed his desire to leave Madrid this summer after two years in the Spanish capital.
Barcelona were Alvarez's preferred destination, but following an explosive row between the two clubs, Atletico have now confirmed they will not sell him to the defending Spanish champions under any circumstances.
Arsenal are yet to table a formal offer, with Atleti indicating they would demand over €150M for the former Manchester City star, and time is against Mikel Arteta with the Premier League transfer window closing on September 1st.
Arteta is rumoured to be keen on bringing in a top-class attacker, amid concerns over Kai Havertz and Viktor Gyokeres' ability to score the number of goals needed to challenge for multiple trophies, but Alvarez looks to be edging towards a stay in Spain.
If Arteta is thwarted in his attempt to sign the 26-year-old, former Gunners star Emmanuel Petit is championing the club to make a bid for Galatasaray hitman Victor Osimhen - who bagged 22 goals last season in Turkey.
"He's a different player, not the same quality as Alvarez. He would bring a powerful presence up front," Petit told Oddschecker.
"He’s fast, he’s a fighter and has a strong personality. He'd bring something different to Alvarez. They are two different options, but I like them both."