The Italian club want to sign Tevez and also have their eye on a summer swoop for Balotelli.
To get the ?45million needed, the cash-strapped Italian giants must sell Brazilian front man Pato.
Paris St Germain are in pole position to land the 22-year-old but the news will have put Chelsea on red alert.
New PSG boss Carlo Ancelotti tried to sign Pato while he was at the Blues and owner Roman Abramovich is a great admirer.
Milan vice-president Adriano Galliani has insisted there are currently no talks with PSG over Pato's future but he did not say the striker was not for sale.
Galliani insisted Tevez has told City he only wants to join Milan, though reports in Italy suggest cross-town rivals Inter are still in the hunt.
Galliani said: "The negotiations are very much alive.
"Manchester insist on a loan with an obligation to buy and we insist on a loan with the right to buy."
Milan want to pay City ?20m for Tevez but over equal annual payments.