Spurs chairman Daniel Levy has failed to tempt the Croatia international into signing an improved deal at White Hart Lane and now faces the real possibility their star midfielder will leave.
Modric has revealed he want to wait until after the European Championships to decide his future, but is expected to tell Levy Spurs' failure to qualify for the Champions League is his main reason for wanting to leave.
Tottenham would prefer he left the Barclays Premier League - leaving Madrid in pole position for his signature.
But even the Spanish champions would baulk at the £50million fee the north Londoners covet for the player who joined for £16.6m from Dynamo Zagreb after the Euros in 2008.
Chelsea owner Roman Abramovich sanctioned a £40m bid last summer and is expected to give his approval for a fresh approach, according to The Telegraph.
City and United are reluctant to become embroiled in a bidding war for Modric who could command anything up to double the £70,000-a-week he currently earns at Tottenham.
And it could be a double-blow for Spurs as Gareth bale considers his future. Like Modric, Bale doesn't want to miss out on Europe's elite competition for another season and has been linked with Barcelona.
But again, Spurs' lofty valuations mean Barca may be warned off from making a bid for the player who is under contract until 2015.