The Reds had been hoping make the 24-year-old Armenia international their star summer signing but the midfielder favours a move to Signal Iduna Park
Borussia Dortmund are confident of winning the race with Liverpool to sign Henrik Mkhitaryan from Shakhtar Donetsk.
The Champions League runners-up have made a concerted push for the Shakhtar midfielder and have joined the Merseysiders in activating his €22 million release clause.
Both clubs have made contract offers to Mkhitaryan, whose move is being brokered by super agent Mino Raiola.
It is believed that the 24-year-old Armenia international is now edging towards choosing Dortmund over Liverpool, with his final destination expected to be confirmed in the next few days.
Tottenham have also registered their interest in the versatile midfielder but are regarded as outsiders in the three-way fight for the player's signature.
Liverpool had lined up Mkhitaryan as a priority signing even before Luis Suarez began pushing for a summer move, with the three-time Armenia player of the year regarded as the most eye-catching target in a summer rebuilding programme that has already included the signings of goalkeeper Simon Mignolet, defender Kolo Toure, attacking midfielder Luis Alberto and forward Iago Aspas.
However, the deal has been a complicated one to complete for the Merseysiders because of legal issues concerning Mkhitaryan’s ownership and the timing of his transfer fee payments, with Shakhtar keen for a single lump sum up front.
Mkhitaryan has failed to attend training in recent days, with Shakhtar chief executive Sergei Palkin admitting he does not know his star man's whereabouts.
Dortmund have money to spend after selling Mario Gotze to Bayern Munich for €37m and Palkin has admitted the German club have bid for his team’s prize asset.
Mkhitaryan scored a Ukranian Premier League record 25 goals last season despite operating from an attacking midfielder berth.