The 17-year-old was signed by the Citizens from Watford for £500,000 ($651,300) in 2015. He is one of the brightest prospects in England and has one year left on his scholarship deal with his current employers.
According to the Sun, the Manchester outfit are ready to hand him a new three-year deal that will see Sancho earn £30,000-a-week ($39,432 per week). However, the winger is set to snub a new deal as he is looking for a move away from City.
The attacker's decision to reject the opportunity to sign a new deal has alerted several clubs in England and Germany. Apart from Arsenal, their north London rivals Tottenham Hotspur and Borussia Dortmund are also believed to be interested in signing him.
Guardiola signed Kyle Walker from Tottenham and the White Hart Lane club wanted Sancho to be included in the part of the deal. However, no player plus cash deal was agreed as only the England international right-back moved to City.
Sancho has been left off the squad for the pre-season trip to the United States. The player believes he will struggle at City to break into Pep Guardiola's first team. He has set his sights on joining Arsenal and believes that Arsene Wenger will be the right mentor for his development.
City fear the Gunners have already won the race in securing the winger's services. A City source told the Sun, "The club is worried Arsenal are front runners for Jadon as he has a soft spot for them."
"His family think he might get a quicker path to first-team action at either Arsenal or Spurs. One of his heroes is ironically Alexis Sanchez. It's proving difficult to get him to sign his first professional contract here.
"He is a top player, one of, if not the best in the youth system. It's not about the money for him at all."
Arsenal have so far completed the signings of Sead Kolasinac and Alexandre Lacazette this summer. Should they manage to land Sancho from City, the teenager will be their third summer signing.