The former Gunners midfielder is one of the favourites to succeed Arsene Wenger at Emirates Stadium, who is to leave his post after nearly 22 years in charge.
Arteta has been backed by ex-Arsenal players including Johan Djourou as an ideal candidate to take the club into a new era, especially given his success alongside Guardiola with City this season.
And the City boss says he wants "the best" for his compatriot, even if it means he leaves the champions' coaching staff.
"If he stays, I will be the happiest guy in the world," Guardiola said after City's 1-0 win over Southampton on Sunday, which saw them set a new record of 100 points in a Premier League season.
"If he decides to move because he has this offer, this option, I will not say 'you don't have to go'. I want the best for my friends, and he's a friend of mine, and I want the best.
"If he decides to go, I will be so sad, but I will understand his decision, because it's his career, his life, his family, and I am not the right guy to say 'you don't have to do that'.
"But, hopefully, hopefully he can stay and finish what we have started together in the coming years."