Sky Sports reports that Inter have claimed they have first option to take him back to the San Siro, having sold him to the current Premier League holders in 2010 for £25m.
Last month, Milan were reportedly favourites, and are believed to be in the market for a striker, having offloaded Alexandre Pato to Corinthians in this transfer window.
The 22-year-old's future at the Etihad Stadium has been called into question on a frequent basis. He only has one Premier League goal to his name this campaign, and had a public training ground bust-up with Roberto Mancini last week.
Mancini insisted recently that he would be given "100 more chances" to prove himself, but with a battle beginning between the two Milan clubs, it is far from certain that Balotelli will still be in England by the end of January.
By Simon Wright - Follow me on Twitter @Siwri88
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