The Algerian wants a pay-off from Leicester before he joins Pep Guardiola’s Premier League champions.
The clubs are close to agreeing a fee but Mahrez wants a slice of the profit from a potential £75million deal.
The Foxes do not want to give the winger anything because he asked for a move when the deal was originally blocked in the January transfer window.
Mahrez has since withdrawn the transfer request.
But Leicester’s owners are still reluctant to give him anything from the proceeds of any move.
Mahrez, 27, has been at the King Power Stadium since January 2014 after joining from French club Le Havre.
In five seasons at Leicester, he has racked up 179 appearances in all competitions, netting on 48 occasions.
Should he finalise his move to the Citizens, he will face competition from the likes of Raheem Sterling, Leroy Sane and Bernardo Silva for a place in the starting XI.
Leicester have already reportedly lined up their replacement for Mahrez – with Basel star Mohamed Elyounoussi the No 1 target.
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