Tevez has not played for City since September when he refused to warm-up during their Champions League game at Bayern Munich and has faced internal disciplinary action with manager Roberto Mancini saying he saw no way back for the player.
A move away from the club in the January transfer window is widely expected and Italian media have reported Milan would prefer an initial loan deal with an option to buy.
That would not sit well with City who would only consider a permanent deal and would be unwilling to take a hit by accepting anything below the market price for the talented player just because of his behaviour, the sources told Reuters.
Neither AC Milan nor Manchester City have commented on the matter.
The Tevez issue hung above Mancini's news conference on Friday despite the Italian's best efforts to bat it away as his team seek to put this week's Champions League setback behind them by continuing their domestic charge.
Mancini, who has faced weeks of questions about the future of the striker who is in Argentina without City's permission, shook his head when the subject was raised again.
"I don't want to speak about Carlos, sorry," he said.
The manager was instead keen to shift the focus to on-field matters as Premier League leaders City prepare to keep up their dazzling domestic form when they visit Liverpool on Sunday.
BIRTHDAY GIFT
Mancini said Tuesday's 2-1 defeat by Napoli in Europe would not have a knock-on effect on the league campaign and remained optimistic that their Champions League journey was not necessarily over yet.
They need to beat Bayern Munich in their final group game next month and hope Napoli fail to win against Villarreal, who have yet to pick up a point.
Asked if his team needed a miracle now, Mancini replied: "I don't believe this.
"I believe if Villarreal play a good game they can beat Naples or they can do a draw but it clearly now depends on the other teams.
"I am disappointed with the result [against Napoli] but only for this... we had 70 percent ball possession, 18 shots against 11. I don't feel we didn't try to win this game."
But he added that his side, making their debut this year, were not yet good enough to win Europe's elite club competition.
"We should be realistic," he said. "I do not think we have a team to win the Champions League this season."
"Real Madrid, Bayern Munich, Barcelona and Inter Milan all have more experience than us."
Returning to matters closer to home, Mancini is keen to avoid a repeat of last season's 3-0 defeat at Anfield as his side aim to maintain their five-point lead over champions Manchester United in the table.
"It was poor [last season]," Mancini said. "Liverpool will be a very hard game... because they are a strong team, they are 12 points under us but I think they have a team to win the Premier League."
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