It is understood that while Dzeko appears set to join City — with one club source on Tuesday claiming a “decisive move” is being made this week for the Wolfsburg striker — Luiz may move to Chelsea if Benfica lower their excessive demands. They have quoted a fee of €40 million (£34 million) for the 23-year-old Brazilian who is wanted by Chelsea manager Carlo Ancelotti and who can play in any position across defence and as a holding midfielder.
However, the Portuguese club may now realise that their expectations are unrealistic, especially as it is well known that they are desperate for cash and have been touting left-back Fabio Coentrao to Europe’s leading clubs, including Bayern Munich, for €20 million (£17 million) — €10 million less than his release clause.
Indeed City’s football administrator, Brian Marwood, is believed to have been in Spain at the weekend to watch Victor Ruiz play for Espanyol against Barcelona, but who is now regarded as a strong alternative to Luiz.
The 21-year-old left-sided defender would cost around €15 million (£13 million) although City hope to secure him for less.
Ruiz is in no rush to leave the Catalan club but it is thought they are keen to cash in on one of the rising stars of Spanish football.
Intriguingly Chelsea and City are both planning to strengthen in the same areas of the team next month — central defence and centre forward.
Chelsea have already been offered striker Hugo Almeida and have been considering whether to sign the Portuguese international who has failed to agree a new contract at Werder Bremen, with his deal expiring next summer.
However, Ancelotti is understood to be unconvinced about Almeida, who has also interested Lazio, and the 26 year-old now appears set to join Turkish club Besiktas who are prepared to meet his wage demands of €2.5 million (£2 million) a year, net of tax.
It is believed Ancelotti would like Chelsea to bid for Carlos Tévez but it will be virtually impossible to prise him away from City — for now — after his transfer-request withdrawal.
Dzeko has been monitored by both City and Chelsea for some time and both have also balked at the price being quoted for him by Wolfsburg which, at one time, was close to €50 million (£42 million) but has since dropped to a more negotiable fee.
There is no pressure for the German club to sell but the 24-year-old Bosnian, who had set his sights on a move to Serie A last year, is determined to secure a transfer to England with his representative having been a guest at the Manchester derby earlier this season.
His arrival would facilitate the exit of Roque Santa Cruz — who City signed instead of Dzeko — and, probably, Emmanuel Adebayor, as manager Roberto Mancini steps up his plans to reshape his squad for the second half of the season.
City also hope to move on Shaun Wright-Phillips and Shay Given while if either Luiz or Ruiz signs, the club will attempt to offload both Wayne Bridge and Joleon Lescott next month.
Chelsea understand that they also have to be active in the transfer window. Ancelotti has received a personal assurance from club owner Roman Abramovich that funds will be made available next month to strengthen his squad and he is determined to test that promise.
As expected, Chelsea announced on Tuesday that winger Gaël Kakuta has signed a new 4½-year contract.