The Chilean coach's agent met with representatives from City in April and an agreement has reportedly been reached.
Although Pellegrini did not confirm or deny the story, he declared he and several players would not be staying at Malaga, due to the club's ailing financial situation.
He told reporters: "I have already made it clear that it is not ideal to end the season in this way.
"We are in unusual circumstances. I don't think any of us really want to leave Malaga.
"Everyone would prefer to stay but unfortunately, the circumstances we are in don't allow that."
Pellegrini was relaxed about the speculation but insisted it would not distract him or the players from their attempts to secure European football for next season:
"Being linked to other clubs doesn't annoy me or make me feel uncomfortable - it's something that usually happens every year. We are just concentrating on making sure the team finishes in the European places.
"The future is uncertain for all of us, the coaching staff and players have discussed our situation but right now, Malaga's main concern must be to focus only on reaching the objectives we set at the start of the campaign."
Malaga's season has fizzled out since they were eliminated in the quarter finals of the Champions League by Borussia Dortmund, and they have taken just six points from five games since then, but Pellegrini denied the season felt bittersweet.
"Not at all. I feel that we have had a great season and have delighted the fans. We just missed out on the semi-finals of the Champions League in circumstances which everyone knows about.
"Great teams like Manchester United, Manchester City and Chelsea didn't even qualify for the quarter finals.
"We have been strong in the league, and have got the same amount of points as we did last year, when we weren't playing in the Champions League."
Malaga host Sevilla on Sunday, but will be without defenders Sergio Sanchez and Martin Demichelis, who are suspended after being sent off in the 6-2 defeat to Real Madrid on Wednesday.
However, full-back Jesus Gamez and centre-back Weligton return to the side.
Sevilla are also challenging for a European spot, although their coach Unai Emery acknowledged their results this season on the whole had not been convincing.
"The challenge for Europe is like a snail's race, and we are slowly getting closer, but we need to pick up the pace," he said
"What we have done up to now has not been good enough, but if we can win on Sunday there will still time to achieve our objectives."