Isco's management team blame Union Berlin for the collapse of his move on Tuesday.
The free agent, having been released by Sevilla, had undergone his medical and agreed a deal to 2024 before Union Berlin pulled out of negotiations.
BILD says Union Berlin made an attempt to redraw the contract originally agreed.
Agents Gestifute stated: "We realised during the course of the talks that the other party in this negotiation was no longer willing to move within the initially agreed framework."
Oliver Ruhnert, president of Union Berlin, said: “We would have liked to have Isco with us, but we have our limits. Today they have been exceeded, contrary to what was previously agreed, so the transfer will not take place."