The out-of-favour Brazilian could be set to replace the veteran striker while Atletico announce that their record signing has passed a medical with flying colours
The Brazilian playmaker has fallen out of favour at the Bundesliga outfit after upsetting coach Felix Magath at the end of last season and has yet to feature this term.
Atletico were thought to be originally weighing up an offer for Espanyol attacker Pablo Daniel Osvaldo but are now unable to finance a €16 million deal for the Argentine after paying €40m for Radamel Falcao earlier this week.
Wolfsburg have reportedly turned down a €5m offer for Diego, with the German club looking for any potential suitor to pay €10m for the former Juventus man.
Any potential deal may rely on Samuel Eto'o's proposed move to Anzhi Makhachkala, with Forlan only likely to join the Italian club if they receive an offer they deem acceptable for the Cameroonian.
The news of Diego's possible arrival at Vicente Calderon comes as Atletico have announced that record signing, Falcao, has passed his medical without any problems on Saturday morning.
Ruben Micael, who joined the Colombian striker at the Madrid club as part of a combined €45m deal has also passed a medical at Real Zaragoza, where he will spend the 2011-12 campaign on loan.