Lookman has been exploring his options away from Atalanta in recent weeks and had considered Fenerbahce as a possible destination.
However, the winger is understood to favour a switch to LaLiga, with the opportunity to play under Diego Simeone proving a decisive factor after the terms of a move to Turkey became complicated.
Sources indicate that a formal agreement could be reached as early as Sunday if final talks go to plan.
Should that deal go through, it would add fresh uncertainty around Alvarez’s future at Atletico, at a time when the club are also trying to sign forward Marcos Leonardo from Al Hilal.
Argentine forward Alvarez was already unsettled by his role in Madrid and is believed to have grown frustrated with his involvement under Simeone.
Arsenal have been monitoring his situation closely since being alerted to doubts over his long-term future.
The Gunners have already been exploring the feasibility of a move for the end of the season.
There will be some complication to work out a suitable package to take Alvarez to north London but Arsenal are aware that any move would require careful structuring. And sources insist the club intend to remain ambitious in the market.
With Lookman edging closer to Atletico, the dynamics around Alvarez could shift quickly.
