The Algeria international handed in a transfer request after Pep Guardiola's side tabled a bid worth £60 million for his services.
However, it is understood that the Foxes demanded in excess of £95m for the winger, who this season has returned to the form that saw him become an integral member of Leicester's title-winning team.
Indeed, Mahrez has scored eight goals and provided eight assists in 24 Premier League outings thus far this season and now appears to be back in favour at the King Power Stadium.
“It’s important to have Mahrez in the squad to look forward and to move on," said manager Claude Puel.
"We’re stronger with him. There’s a good feeling in the team. Today we have an opportunity, against a team we have already played twice, to try something different.”
Guardiola's men, meanwhile, sit 13 points clear of second-placed Manchester United and will hope to extend that resounding lead this weekend, with United playing on Sunday.
Sergio Aguero leads the line for the Blues, while January signing Aymeric Laporte partners Nicolas Otamendi in defence.
Guardiola named just six substitutes last time out, as City drew 1-1 with Burnley, but has picked seven this time, with youth prospects Lukas Nmecha, Phil Foden and Brahim Diaz all involved.
Man City XI: Ederson, Walker, Laporte, Otamendi, Zinchenko, Fernandinho, Gündogan, De Bruyne, Sterling, Bernardo, Agüero Subs: Bravo, Danilo, Kompany, Stones, Nmecha, Foden, Diaz
Leicester XI: Schmeichel, Dragović, Maguire, Fuchs, Albrighton, Silva, Ndidi, James, Chilwell, Diabaté, Vardy. Subs: Jakupović, Simpson, Benalouane, Iborra, Gray, Mahrez, Iheanacho.