The Chilean international, who moved to the Emirates from Barcelona in 2014 has one year left on his current contract. Sanchez has been the star player for the north London club in the last three seasons. He scored 30 goals and registered 13 assists in all competitions in the 2016/17 campaign.
Sanchez has expressed his desire to leave his current employers in order to play in the Champions League. City have long been interested in securing his services as Pep Guardiola wants to reunite with his former player at the Etihad.
According to the Guardian, the former Barcelona forward is keen on playing under the City manager. Guardiola's side are favourites in securing his signature and Merson has advised Arsenal to ask for Aguero as part of a swap deal.
"I don't think Arsenal can replace Sanchez, can they? He gets 30 of their goals, but you've got to move on," Merson told Goal.com.
"If someone doesn't want to be at the club, Arsenal are a big club and you don't want players who don't want to be there. Arsenal are a big club, a very big club and you don't want that.
"He's a good player - if I were Arsenal I'd be ringing up Man City and saying 'Give us Aguero and you can have Sanchez.' [If Alexis wants to go to Man City] then I'd say I want Aguero. He's better than Sanchez."
A Sky Sports report claims that Chelsea have "serious and strong interest" in signing the Argentine international to replace Diego Costa at Stamford Bridge. However, City are adamant that Aguero, who is their star player, will not be allowed to leave the club.
With Aguero's employers determined to retain the striker, it is unlikely that Arsenal and Antonio Conte's side will have any chance of signing the former Atletico Madrid star. It should be seen whether the Gunners will be successful in retaining Sanchez beyond this transfer window.