The Daily Mail says the battle between Spurs and City to sign Palacios took a new twist when it emerged Wigan have offered the Honduras midfielder a new contract in a last-ditch attempt to keep him.
Palacios will double his wages to around £20,000 a week if he decides to stay, although the offer still falls short of what he could earn at White Hart Lane or Eastlands.
Palacios favours a move to City because he would not have to relocate from his home in the north-west.
That is also Wigan's preference because they would receive more of the cash up front, although Spurs are understood to have relented in their desire to spread the £14m fee over four years and will pay the money over half that period.
With Daniel Levy overseeing negotiations, Redknapp said: "I like Palacios and the chairman is trying to do something there."