The Spaniard’s loan spell at the San Siro expires at the end of the season and, while the Rossoneri do have the option to sign the player permanently from Real Madrid, they are not willing to pay the €22m (£19.4m) fee.
Diaz worked with Gunners boss Mikel Arteta during his time at Manchester City. He left the Etihad for Real in 2019 before moving on a temporary basis to Milan.
With his swith to Italy now in doubt, it will give other clubs the opportunity to sign the 23-year-old. In addition to Arsenal, reports in the English press this week have linked both Chelsea and Newcastle.
It is believed that Real would probably be willing to offload Diaz for around £30m and, considering his age and potential, it’s not surprising that a number of Premier League clubs are taking an interest.