The Mirror understand that Chelsea’s £20 million offer was turned down by Real Madrid, whose recently-appointed manager Rafael Benitez has no plans to offload the Spanish midfielder.
The report adds that Chelsea are prepared to sell Oscar, who is wanted by Juventus, but the Italian club are only offering £12 million for the Brazil international - and that would only be paid after a season-long loan spell.
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Oscar, 23, has failed to progress at the pace Chelsea expected he would after securing his services from Internacional in the summer of 2012.
He scored six goals and provided eight assists in the Premier League last term, but was nowhere near as influential as the likes of Eden Hazard, Diego Costa and Cesc Fabregas as the Blues won the title for the first time since 2010.
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Isco becoming increasingly important for Madrid
Isco is seven months younger than Oscar and was superb for spells of last season with Real Madrid who, around the turn of the New Year, became increasingly reliant on the former Malaga star whose style of play has drawn comparisons with Barcelona icon Andres Iniesta.
The 23-year-old scored four goals and provided nine assists in La Liga last term but could find himself demoted to the bench depending on how Benitez plans to setup next season.
It’s understood that Benitez will attempt to convince Cristiano Ronaldo to play as the team’s centre-forward, while Gareth Bale could be moved to the left - from the right flank - to replace the Portuguese superstar.
Isco can play as part of the midfield trio - he was deployed alongside Toni Kroos and James Rodriguez in the Champions League semi-final against Juventus - but Luka Modric will return to central midfield for the start of the season after recovering from injury.
Isco is a better player than Oscar
There’s little doubt that Isco has a bright future ahead of him at Real Madrid - and Chelsea will need to improve their offer significantly in order to tempt the Spanish giants into selling the attacking midfielder.
As for Oscar, it seems Mourinho may have lost faith in the South American, who also failed to shine at the end of the 2013-14 campaign - a crunch period of that particular season for Chelsea which resulted in a trophy-less season.
Chelsea fans: would you sell Oscar in order to sign Isco? Let us know by leaving a comment in the box below!