The 2006 world champions are without a head coach after parting company with Gennaro Gattuso back in April after he failed to lead the side to the World Cup.
Guardiola is currently out of work for the first time in 10 years after stepping down as Manchester City boss in May in what was an emotional goodbye to a side where he won every trophy possible.
Guardiola reportedly earned an eye-watering £20million per year at City but would be offered around £680,000K with Italy which is what Gattuso earned before being let go.
Revealing that talks had taken place, Malago spoke on Guardiola and revealed that despite financial restrictions, they would find a way to make it work.
"It's not a given that this (talks with Guardiola) will come to fruition, but I believe it was right and important to open a dialogue and keep it alive," Malagó told the 'Cronache di Spogliatoio' podcast.
"This (talks with Guardiola) is by no means a lack of respect towards other candidates, with whom discussions have already begun, and adding another name would in no way detract from the process.
"There are also financial and budgetary considerations. In the short to medium term, to say that we'll have to tighten our belts is an understatement. However, some exceptions have been made, which may relate to the name that is so dominant at the moment."
Asked if he was referring to Guardiola, he said: "Yes."
Other candidates for the role are Antonio Conte, Roberto Mancini and Andrea Pirlo but Guardiola is the frontrunner. Reports state Italy are waiting to hear his response this week in what could be an exciting move ahead of Euro 2028.