The 20-year-old spent the 2022-23 season on loan with the Blades, helping the club gain promotion to the Premier League under the stewardship of Paul Heckingbottom.
McAtee featured in 37 matches for United as they finished second behind Burnley — starting 21 of those games — scoring nine goals and providing three assists.
The attacking midfielder has been a regular for the Premier League champions' youth teams over the past four years, while also earning call-ups for England at Under-21 level.
According to The Sun, McAtee is currently favouring a move back to Sheffield United this summer, with the Blades now plying their trade in the top flight.
It is understood that any switch away from the Etihad Stadium for the youngster would be temporary, with Man City not willing to cut ties with a player who impressed in the second tier last term.
The report claims that with Bernardo Silva's future at the treble-winning Citizens secured, the club are now prepared to allow McAtee to develop his game elsewhere for the season.
There was said to be serious interest in the Portuguese playmaker from Barcelona, Paris Saint-Germain and Al-Hilal in this summer's window, however Man City were not willing to let the 29-year-old leave for less than their £75m valuation.
Silva has put pen to paper on a fresh three-year deal at the Etihad, meaning that McAtee is free to move away from the club for the 2023-24 season.
Despite this, Heckingbottom's Blades could have difficulty in bringing the midfielder back to Bramall Lane, with Guardiola supposedly favouring a move to a top-half
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