Alexis Sanchez thought he was leaving but Gunners pulled plug.
The Gunners had lined up Thomas Lemar to replace him and Sanchez thought he was on his way out.
But Lemar wants to join Liverpool instead and it now appears a move is dead in the water.
Balague tweeted: “As it stands, Arsenal pull out of Lemar negotiations. So Alexis, much to his pain, stays. Will there be more twists?
“1. What a situation. Alexis thought he was leaving as City/AFC reached a deal (£55+5). It will be very hard to bring him round.
“2. At this stage City not willing to add a £ to the deal agreed with AFC. AFC not told them yet they not selling Alexis. Would you keep him?”
Manchester City today submitted a second bid for Sanchez.
They had an offer of £50million for the Chile international forward rejected earlier in the week.
The club are now awaiting a response from the Gunners to their latest, improved, offer.
Sanchez, who is in the final year of his contract at the Emirates Stadium, has been linked with a move to City for most of the summer. Gunners boss Arsene Wenger has consistently maintained the player would not be sold but that has not stopped speculation.
A deadline-day sale to City would leave Arsenal little time to find a replacement but forcing him to stay would run the risk of losing him on a free transfer next year.
There were suggestions earlier in the week the Gunners might be interested in a player exchange for England forward Raheem Sterling, but City distanced themselves from that possibility.