Reports earlier on Tuesday suggested City were prepared to pay up to £60million for the Algeria global despite Pep Guardiola claiming that he was "90 to 95 per cent" sure the club wouldn't make further signings this month.
"Right now we have just three strikers with Raheem [Sterling], for the next month or month and a half. We have to find solutions".
The decision is bound to frustrate Mahrez who handed in a transfer request and did not travel with the rest of the squad to face Everton on Wednesday night. We don't have too much and we play every three days.More news: Flu season on track to be worst in a decade
More news: #BlackPanther: Incredible and kinetic red carpet looks
More news: Paul Ryan just claimed Obama delayed troop pay during 2013 shutdown
According to various media reports, Leicester rate the Algerian Premier League victor much higher than the £50m that has been mentioned.
The Spaniard added: "It happened with (Aymeric) Laporte because it's a buy-out clause".
The Deadline Day is like a box of chocolates, you never know what you're going to get.
In a late development, Manchester City have had a surprise bid tabled for Riyad Mahrez and turned his head on a transfer to the Etihad in the last stages on Tuesday. He feels very strongly that he has done everything in his powers for the club.
According to the Press Association (via MailOnline), City pulled out of signing Sanchez because they were unwilling to pay more than £20 million for him.