According to the Daily Express, which cites reports from Italy, Arsene Wenger has told Gunners chiefs that he is willing to sanction a deal to bring the £31m-rated Dybala to the Emirates Stadium.
The forward has been attracting interest from several Premier League clubs since his sparkling start to the Serie A season - Dybala has nine goals already this season in all competitions and was tipped by former-Manchester United coach Phil Neville as one to watch.
Neville urged his former club to beat rivals Arsenal to his signature, and Louis van Gaal's side have been heavily linked.
But considering the interest from two of English football's biggest clubs, Dybala's employers Palermo have jacked up his asking price.
They want £31m for the 21-year-old, who has become one of the most wanted players in the Italian top flight. But while they're happy to agree the sale of Dybala, Palermo want to delay the deal until the end of the season.
Currently 12th in Serie A, Palermo president Maurizio Zamparini is keen to avoid losing his side's best player mid-way through the season when it would be difficult to replace him.
'The new Aguero'
Dubbed the 'new Sergio Aguero', Zamparini believes Dybala could be as good as Messi and Ronaldo in the next few years.
"Within two years, he's going to be better than Cristiano Ronaldo, Messi and Ibrahimovic," Zamparini said. "It would take €40m (£31m) to take him away from us. He's the best striker in Serie A."
Dybala has six goals and two assists in 13 league appearances so far for the Sicilian club.
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