The 22-year-old German international is out of contract at the Veltins-Arena in June 2013, and after failing to reach agreement over a new deal, now looks set to move on in January.
Reds boss Brendan Rodgers has been credited with an interest in bringing Holtby to Anfield in the New Year, as the Northern Irishman looks to strengthen his midfield and forward options in the forthcoming transfer window.
Liverpool have been monitoring the situation closely for some time, and now that it has emerged talks have broken down, the Premier League side are ready to step up their pursuit of the young star.
Under the Bosman ruling, Holtby will be free to speak to Liverpool from January 1 about a prospective move at the end of the 2012/13 campaign, with Schalke powerless to prevent such negotiations from happening.
However, if Rodgers wants to bring the player to Merseyside next month Liverpool will have to pay a fee - albeit a cut-price one - to make that possible.
Recent reports had suggested that Holtby was seeking wages amounting to almost £5million-a-year, but his agent, Markus Noack, rubbished such suggestions, saying that the figure had been "plucked from the air".
The former Alemannia Aachen star would certainly struggle to command that sort of salary at Liverpool, who are understood to be taking a more conservative approach to negotiations in the transfer market than in previous seasons.
However, Holtby does fit the profile of player that Rodgers, under the guidance of owners Fenway Sports Group, is seeking to recruit, so an enquiry and approach for his services can be expected.