Alaba, 28, has less than a year remaining on his current Bayern deal, with both parties reaching an impasse in negotiations amid the coronavirus crisis.
The German champions are unable to match his salary demands due to the pandemic, which has damaged club finances across the globe, and have therefore withdrawn their original offer.
According to Spanish outlet AS, Alaba is attracting interest from five top European clubs with just two months to go until he can begin negotiating a free move abroad.
Liverpool and City are said to be keen on signing the Austrian, who is capable of operating at both left-back and centre-back.
However, it is believed the Premier League duo will face competition for his signature from Real Madrid, Juventus and Paris St-Germain in January.
Madrid reportedly have Alaba ‘on their list’, despite Ferland Mendy and Marcelo currently occupying their left-back slot.
Yet Los Blancos chiefs are aware that opportunities to sign world-class players free of charge do not present themselves every day, meaning they are weighing up a potential move in the new year.
And amid his recent run at centre-back for Bayern, the Spanish champions believe Alaba would serve as a versatile defensive option for Zinedine Zidane.
Liverpool, City, Juve and PSG are understood to have ‘specified their interest’ in the player, yet reports in Sport Bild suggest he has his sights set on either Madrid or Barcelona.
The El Clasico rivals are both on the hunt for cheap recruits after taking financial hits from the coronavirus crisis, with Madrid uncharacteristically spending no money in the latest summer window.
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Alaba recently hit out at Bayern chiefs over their handling of his contract situation, insisting he only learnt of their decision to withdraw an extension offer ‘on the news’.
“I heard it like everyone else on the news,” he said. “I cannot say how it will continue from this point. I am glad to be playing for Bayern, and to be a part of the team. But what the future will look like after yesterday evening I just cannot say, as no one has talked to me officially.”