Manchester City have pulled out of the race to sign Arsenal forward Alexis Sanchez, sources have told ESPN FC.
Pep Guardiola held talks on Monday with City hierarchy -- Chairman Khaldoon al Mubarak, chief executive Ferran Soriano and director of football Txiki Begiristain -- and all agreed to decide to end the pursuit of Sanchez, the sources said.
Manchester United now appear to be favourites to sign the 29-year-old Chilean, though sources say his agent has now opened talks with other clubs.
Arsenal are believed to want around £35 million for Sanchez, who is out of contract at the end of the season.
City were close to signing him on deadline day in August, until the Gunners pulled the plug on a £55m deal when their plans to sign a replacement fell through.
But sources said they now consider the package being demanded means he could end up costing more than that the deal agreed in the summer.
The Premier League leaders had been prepared to wait until the summer to sign Sanchez with City believed to be the players' preferred destination. However, sources said he is desperate to leave the Emirates Stadium in this transfer window.
But sources also said City did not see him as a crucial signing and that they are happy with the balance of the squad and not prepared to take any chances on upsetting a side that is 12 points clear at the top of the Premier League and still competing in three cup competitions.
Reports have suggested United could send Henrikh Mkhitaryan to Arsenal as part of a deal for Sanchez, and United manager Jose Mourinho said that he left Mkhitaryan out of the squad that beat Stoke 3-0 on Monday because of "doubts" over his future with the club.
Mourinho also said after Monday's game that he was "relaxed" over the move and said he believed United had a "chance" at Sanchez if he leaves Arsenal.
"We have a feeling he is an Arsenal player, he can stay there but also a feeling he can move and if he moves I think we have a chance, but most probably a player like him has other big clubs interested and who knows," Mourinho said.
"I think him, [Arsenal coach Arsene] Wenger, [CEO Ivan] Gazidis, they are the ones who know what is going to happen. I don't know anything about it and I don't have one single information, so let's see what happens."
City have been also boosted by news that striker Gabriel Jesus could be back in the next few weeks after recovering from a knee injury.