Guardiola has announced that he will clarify his future at Bayern next week and the German club are understood to have reached a gentleman’s agreement with Ancelotti to take the job if the Spaniard leaves at the end of the season.
That would rule Ancelotti out of returning to Chelsea in any capacity as a successor to Jose Mourinho and will give City huge encouragement that Guardiola is prepared to make the Etihad Stadium his next destination.
Chelsea are among the clubs interested in Guardiola, but City director of football Txiki Begiristain has remained in close contact with the 44-year-old since they worked together at Barcelona and the pair are believed to have talked within the past month.
City only extended the contract of current manager Manuel Pellegrini through to 2017 in August, but it is understood the club can quite easily terminate their agreement with the 62-year-old without facing a big compensation bill.
The dilemma will come for City if Pellegrini leads the club to the Premier League title and progresses further than Bayern in the Champions League.
Ancelotti is the most attractive out of work manager who Chelsea could ask to replace Mourinho mid-season, but the Italian now seems destined for Germany in the summer.
The 56-year-old was sacked by Real Madrid in the summer, despite winning the 2014 Champions League with the Spanish club and also lifting Copa del Rey.
Other than being linked with a return to Chelsea, where he won a Premier League and FA Cup double in 2010, Ancelotti has also been touted as a possible successor to Pellegrini at City.
But Ancelotti is now in line to take over from Guardiola, with City poised to make their move to land the most highly-rated manager in Europe.
Guardiola’s Bayern contract expires at the end of this season and he has promised to reveal his future after the club’s final game of 2015 at Hanover 96 on Saturday.
“Next week you will know the answer,” said Guardiola. “Next week there will be clarity.”