The attacking midfielder claims a move to the Spanish capital excites him, although the Premier League runners-up remain confident that they can secure a deal for the 21-year-old
Goal reported on Friday that Manuel Pellegrini's side were confident of securing a deal for the 21-year-old and are willing to pay £20 million, plus a further £10m in add-ons for the Spaniard.
Isco revealed earlier in June that he has received offers from both Madrid and Manchester City though his latest comments indicate that he would prefer to remain in Spain.
"Real Madrid are a club that excites me," Isco was quoted as saying by AS.
"They are one of the best teams in the world."
Arsenal defender Nacho Monreal, who played alongside Isco at La Rosaleda between 2011 to 2013, claimed at the weekend that the midfielder has already signed for Madrid.
Isco has a contract with Malaga until the summer of 2016, but has a release clause of £30m.