Wolfbsurg are prepared to demote Diego to their reserve side, which would mean competing in the fourth tier of German football.
The Brazilian attacking midfielder spent last season on loan at Atletico Madrid, and is eager to leave the Bundesliga team on a permanent basis.
Despite a move to Flamengo being speculated, Diego is back in training with Felix Magath’s men and may well be stuck in Germany if a transfer does not materialise before the end of the summer trade period.
As such, the 27-year-old could face the prospect of playing in the fourth division at Wolfsburg II, with coach Lorenz-Gunther Kostner stating that the playmaker will not be given the star treatment.
"If Diego comes to us, I will tell him that he will be used like any other squad member,” the reserve trainer told Bild.
Magath recently admitted that he is not happy with the manner in which Diego is conducting himself in training.