The report claims Madrid president Florentino Perez made an approach for Thiago in the last two weeks, but the player's advisors - including his father Mazinho - flat out rejected talks.
Because Manchester United remain his preferred option, with the midfielder reportedly excited by the prospect of a Premier League challenge next season.
Madrid felt they could persuade Thiago by selling him the vision of a new look Bernabeu midfield alongside fellow Spain under-21 star Isco.
But Thiago didn't want to cross the Clasico divide, and reportedly prefers a move out of Spain should he leave the Nou Camp.
The Spanish giants have completed the signing of Isco from Malaga, and will now instead turn their attention to Thiago's other under-21 teammate, Real Sociedad midfielder Asier Illarramendi.
The report claims that Thiago is looking forward to playing for United after receiving assurances over playing time at Old Trafford.
Speculation had linked ex-Barcelona coach Pep Guardiola with a move for his former-player, and Bayern Munich are still thought to be monitoring developments.
The midfielder's €18m release clause means all three clubs stand a realistic chance of landing the player, but United hold the advantage at the moment.