While no formal offer has been made, it is believed that talks are continuing between both clubs and Balotelli's agent.
Manchester City have maintained throughout this window that Balotelli will not be sold in January.
The Italian has regularly been linked with a move back to his homeland since arriving at City in the summer of 2010, and Milan boss Massimiliano Allegri was questioned on his interest in the striker after side's 1-0 victory over Atalanta on Sunday.
Allegri was reluctant to discuss another club's player but admitted he was an admirer and indicated that Balotelli's controversial character would not be a problem.
"Balotelli? I won't think about him because he is a Manchester City player," Allegri told Sky Italia.
"If he arrives here, then I'll consider how to approach him. Obviously, I wouldn't say no.
"We are setting up a good, disciplined group and that is important in a difficult League like Serie A."