Liverpool is considering tabling a £10m bid for Palermo midfielder Josip Ilicic.
The Gunners were also eyeing up a move for the 25-year-old in the off-season but have since cooled their interest as they pursue other target.
Ilicic has grown in stature at Palermo, and was highly impressive for the Serie A outfit, as he clocked up 31 appearances.
But reports emanating from Italy suggest that Liverpool could swoop in for him, with Palermo facing up to life in Serie B next season.
Ilicic's agent had originally said in May that offers from Italian clubs will be given priority.
"He will certainly leave Palermo. He is wanted by several different sides, Italian and overseas, but we are still in the beginning of the process," Amir Ruznic told Sky Sports.
"In any case, Italian offers have the priority. AC Milan? I have not been contacted directly by the Rossoneri, but that doesn't mean the two clubs haven't been in talks."
Liverpool is likely to face stiff competition from Fiorentina, and the midfielder hasn't hidden his desire to join La Viola.
"Fiorentina are the team I like the most in Italy, they made a great team and will fight for the Scudetto with Juventus next year," said Ilicic.
"Fiorentina are the team who inspire me the most in terms of the quality of their football. And I also know that I can't jump steps.
"I'm a Palermo player and I can't dream of - let's say - Manchester United. That would be stupid."
Ilicic hit double figures in Serie A last season.
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