The Spain Under-21 international had already confirmed that he had a decision to make over his future, and has now moved to confirm the identity of the suitors.
Isco has had an impressive season at Malaga, scoring nine league goals and helping his side qualify for the quarter-finals of the UEFA Champions League.
His club form has also recently been reflected on the international stage, with the attacking midfielder one of the stand-out players at the European Under-21 Championship in Israel, with Spain through to Tuesday's final.
"There are two propositions on the table," Isco said: "I hope to decide soon because I still have a contract with Malaga.
"I know that both Manchester City and Real Madrid are great clubs. I want that whatever happens will be the best for me and Malaga."
New Manchester City manager Manuel Pellegrini worked with Isco last season at Malaga, and the Spaniard admitted that this could aid the Premier League club's approach.
"It is true that I already know Pellegrini. I know how he works and he has been fundamental in my career," he added.
"It is a point in favour that we have already been together but it is not definitive."