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British Sky Sports television have named the former Villarreal and Real Madrid coach as one of the favourites to replace the sacked Roberto Mancini at City and it had been reported that Malaga would let Pellegrini go without demanding the €4 million compensation detailed in a clause to cover the remaining two years of his contract at La Rosaleda.
"We have not given Pellegrini authorisation to leave the club," a Malaga spokesman told AFP, before adding that the club had also called Sky Sports after the reports came out.
"The season is not yet finished and we are still fighting to qualify for the Europa League. It is therefore not the right time to talk about this," added the spokesman.
Malaga currently lie in sixth place in La Liga with two games to play. They need only finish in the top seven to qualify for the Europa League although they are currently fighting to overturn a ban from continental competition handed down by UEFA.
Malaga were handed the ban in December as a punishment for failing to pay salaries, an infringement of UEFA's strict new financial fair play rules.
The Court of Arbitration for Sport in Switzerland will rule on their appeal against the ban on June 4.
