Le 10 Sport claims Madrid have identified the City star as their top January transfer priority, and have valued the player at around the €40m mark.
Bayern Munich boss Pep Guardiola is also an admirer of the Argentina international, but the German giants look set to snap up Robert Lewandowski instead next summer.
That could give the La Liga side a free run at the City forward, although Manuel Pellegrini is unlikely to be open to bids for the club's star forward.
Aguero scored two in a superb display against Manchester United last month, and he's been City's most consistent forward this season.
Injury ruled him out of the trip to Aston Villa on Saturday - a match City lost 3-2 - but he's expected to return to the starting lineup against Bayern Munich on Wednesday evening.
City brought in two forwards over the summer - Alvaro Negredo from Sevilla and Stevan Jovetic from Fiorentina - but that doesn't necessarily mean any of their strikers are available for transfer.
The Citizens sold two of their first-team forwards in the first six months of the year - Carlos Tevez joined Juventus, following former-City star Mario Balotelli to Serie A.