The former-Swansea winger signed for Manchester City this summer as a direct replacement for Sunderland-bound Adam Johnson, who left the Premier League champions in an effort to secure regular football.
But Sinclair has struggled to make an impression on the City first-team - his contribution totalling just 15 on-pitch minutes in the past two months.
The report claims City's interest in Isco is growing, with Roberto Mancini and director of football Txiki Begiristain both watching the 20-year-old in action for Malaga this season.
The young attacking midfielder has a £17m release clause, and while City are unlikely to move in January, Mancini could agree a deal to bring the Spanish under-21 international to the Etihad Stadium next season.
And City assistant manager David Platt revealed Mancini's 'door is open' for Sinclair if he wants to get first-team football elsewhere.
"When a player comes to this club, they are going to have to accept they are not going to play week in and week out," Platt said.
"Some will play more than others, but when we spoke to Scott, he knew what he was coming into and that it was a big, big squad.
"The manager's door is always open to any player if they feel they want to go and play, like Adam [Johnson] did, but Scott seems happy and hasn't made any noises about that."