According to the French Publication RMC Sport, the Premier League club's manager Pep Guardiola is an admirer of the 20-year-old Dembele. He is keen on bringing him to the Etihad in the summer transfer window.
Any approach from City will see Guardiola face competition from his former club Barcelona. The player's representatives have already held negotiations with the Catalan club and the English side.
Dembele's situation at Dortmund remains complicated and the player has set his sights on leaving the club. The France international is targeting an exit after Thomas Tuchel left Signal Iduna Park at the end of the season. He was close to his manager and is looking to follow him out of the club.
Dortmund are looking for a fee around €85m (£74.7m, $97.2m) to sanction Dembele's sale this summer. The asking price for the player has put off both City and Barcelona in making any approach for the attacker.
The situation has forced City to look elsewhere in the transfer market. The option of signing Coman has been discussed as an alternative to Dembele, due to the latter's price tag slapped by Dortmund.
Coman was initially signed by Bayern on loan from Juventus when Guardiola was in charge at the Allianz Arena. The Bundesliga winners exercised their option in signing the 21-year-old Frenchman on a permanent transfer earlier in April and he is contracted to the club until 2020.
His form for Bayern has seen him attract interest from the Premier League. The same report also claims that apart from City, the English champions Chelsea are also looking at the option of signing him. Carlo Ancelotti is an admirer of Coman and is not looking to sanction his sale.