The sporting director is determined to see the club become a competitive European force and says the Italian has a big role to play in a "unique" project
The Italian is rumoured to be los Blancos' number one choice to replace Jose Mourinho, if - as expected - the Portuguese departs the Santiago Bernabeu this summer.
However, PSG's sporting director believes that the Italian would be wise to reject any overtures from other clubs and remain in the French capital to oversee his team's development.
"The situation with Carlo is like one with a player, who has an offer on the table," the 43-year-old Brazilian told Le Parisien.
"He will give us information about what's going to happen. Honestly, we do not know.
"We want to make this a great club, to be competitive in the Champions League for the next 10 years. If Real or Barcelona came to see me today, I would refuse and stay here. There is a challenge here not seen at other clubs."
Les Rouge-et-Bleu recorded a 3-1 win over Brest on Saturday in their final home game of a title-winning season, and Leonardo believes that Ancelotti can build on the foundations of that success.
"We have always believed in keeping Carlo," the former AC Milan midfielder added.
"We need him- it's better for the club that he remains. We are seeking basic continuity. It is better to continue with him, that's for sure. He created something. The priority is to continue with him.
"We all have temptations but, even though PSG is not yet a big club, we have a challenge here that does not exist elsewhere."