The Italy striker, who joined the Premier League club from Inter in 2010, has been out of favour at the Etihad Stadium this season, making just one start in the last eight matches.
And it appears that the Rossoneri could offer City boss Roberto Mancini the chance to cash in on the controversial striker after Allegri revealed his admiration for the 22-year-old.
"He is an important player with extraordinary physical and technical qualities," the Milan coach told reporters.
|WHY ALWAYS THREE?|
|50/1||Mario Balotelli is 50/1 with William Hill to score a hat-trick in the Manchester derby|
The former Calgliari boss also highlighted Balotelli's international partnership with Milan's Stephan El Shaarawy as a tantalising prospect.
"I think they have done good things with the Italian national team," he added.
"But I want to talk about AC Milan and the players I have. Then, in January, we will see what happens."
Speculation surrounding the mooted deal was further fueled by Milan president Silvio Berlusconi who, when quizzed by Sky Sport Italia about a potential move for the forward, replied: "No, it's not a dream. I never dream."