The Spain Under-21 star, who played under new City boss Manuel Pellegrini at Malaga, has admitted that both sides are keen to sign him, but has yet to make a decision on his future
Goal revealed in May that Isco headed a short-list of six players, including Jesus Navas and Fernandinho who have already signed for the club, as City eye a £120m spending spree in their quest to reclaim the title.
Isco has long been linked with a move away from Malaga and has now admitted that City and Madrid are leading the race for his signature, but he has yet to make a decision on his future.
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"I hope to make a decision soon because I still have a contract with Malaga. I have already said before that Madrid and City are both great clubs. I want the best solution for Malaga and for myself.
"It doesn't matter to me who the owner or president is. I just want to play football and have fun. It doesn't matter to me what kind of formation a team plays. I have my own characteristics, but you always have to adapt to your surroundings."
Goal reported last month that the 21-year-old playmaker was eager to follow former boss Manuel Pellegrini to the Etihad Stadium, and Isco was full of praise for the Chilean.
"I have not spoken to him yet. I heard about his move to City on the Internet," the Spain Under-21 star added.
"He's a great coach and I hope he will do well in England. He did an impressive job at Malaga and at other clubs in the past, so I have little doubt that he will succeed at City.
"It's a fact that I already know Pellegrini. I know how he works and he has played a key role in my career so far during our two years together at Malaga. It's a plus that I already know him, but there isn't anything definitive as of yet."