The London Evening Standard says after weeks of negotiations, the clubs couldn't agree on a suitable fee for the 28-year-old Switzerland international and a move failed to materialise.
Rather than sulk following his transfer collapse, Xhaka has impressed in training.
He and Mikel Arteta's relationship remains a good one and his performances last season were a rare bright spot in a dismal campaign in which the Gunners finished in eight place and missed out on European football for the first time in 25 years.
Xhaka is now set to be part of Arteta's team for next season and the Gunners will begin their Premier League campaign at newcomers Brentford on Friday, August 13 with the hope of regaining European football.
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