The Citizens are understood to have turned down an £18m bid from Al-Ahli for Mahrez and they are expecting the Saudi Arabian club to return with an improved offer.
The 32-year-old winger has spent the last five seasons at the Etihad Stadium, recording 78 goals and 59 assists in 236 games, as well as winning 11 trophies including four Premier League titles.
Mahrez still has two years remaining on his Man City contract, but he is believed to be leaning towards a new experience in the Middle East and is said to have agreed personal terms with Al-Ahli.
With the long-term future of Mahrez at the Etihad uncertain, Football Insider reports that Pep Guardiola's side have identified Spain international Olmo as a possible replacement.
The report adds that Guardiola and Man City chiefs have admired Olmo for some time, and the Citizens could firm up their long-term interest in the versatile Leipzig attacker if they agree to part ways with Mahrez.
Leipzig are said to be under no pressure to sell the 25-year-old, who signed a new four-year contract until June 2027 with the Bundesliga club at the beginning of last month.
The Germans may also ben reluctant to lose another star player this summer having already seen midfielder Dominik Szoboszlai join Liverpool, who activated the Hungarian's £60.2m release clause last month.
Olmo has previously attracted interest from the likes of Manchester United, Real Madrid and former club Barcelona, where he began his career in the club's youth system before joining Dinamo Zagreb.
Comfortable operating as an advanced midfielder or in any position across the front
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