This leaves their rivals Manchester United, with a clear run at tying up a deal for the player this week.
City reportedly made it clear on Friday, that they would walk away from the deal if the financial commitments did not favour them.
It is believed that Sanchez’s agent, Fernando Felicevich, has now informed City that United are willing to pay more money in both wages and extra fees.
This represents a dramatic u-turn, as City had agreed terms with Felicevich ahead of a transfer this month.
Pep Guardiola is believed to be on board with the decision to no longer pursue Sanchez, despite making the forward his No.1 target throughout last summer.