It comes as a massive blow for Milan, who are also keen on making his deal permanent.
Diaz moved to San Siro on loan in 2020 and has since been an integral part of Stefano Pioli’s side.
Last season, he played a big role in Milan winning the Scudetto for the first time in eleven years.
His importance has grown even further this season as he scored the only goal over the two legs against Tottenham Hotspur in the Champions League, which helped Milan book their place in the quarter-finals.
Pioli recently praised the Spaniard as a complete player and stated that the playmaker looks happy to continue with Milan.
They have the option to make Diaz’s loan permanent for €22 million, while Madrid can buy him back for €27m.
A recent report from La Gazzetta dello Sport (h/t SempreMilan) suggested that Milan were looking to negotiate a fee with Madrid for up to €16m plus bonuses.
It will be interesting to see how the development unfolds in future and how concrete Madrid’s intentions are to get Diaz back.
The 23-year-old would face tough competition from Dani Ceballos, Eduardo Camavinga, Aurelien Tchouameni and Federico Valverde for a place in the first team if he returns to his parent club.
Madrid are in hot pursuit of Borussia Dortmund midfielder Jude Bellingham and Celta Vigo’s Gabri Veiga, which raises further questions about Diaz’s future.
Milan are also working on the contract extension of Rafael Leao, which remains their top priority at the moment.
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