Recent talk had been of an audacious bid for the Spaniard from the Merseyside club, with whom he made 210 appearances over five years and helped to lift the Champions League in 2005.
But speaking after Real's 1-0 friendly victory over Paris St Germain, Ancelotti said, as per the Metro:
We believe that in the end we will find a solution and the club and the player will reach an agreement
Alonso has done little to dampen speculation about his future when speaking to the Spanish media on Jan 1, per Sky Sports News:
I have not decided on my future. I will only stay at Real Madrid if I can offer the same level on the pitch as I can now and we will see what happens in the next few months.
There is always a chance I could go back to the Premier League as I always enjoyed good times there.
Liverpool sit fourth in the Premier League after a fine start to the season. Much of that start can be owed to the exploits of Luis Suarez.
But Liverpool's midfield has been in fine fettle too, led by captain, Steven Gerrard, and young playmakers Philippe Coutinho and Jordan Henderson.
Alonso's arrival might have helped to shore up a strong midfield this season, but Brendan Rodgers’ policy of developing youngsters is likely to pay dividends in the long run.
But Liverpool have been quick to dismiss such rumours.
The diminutive winger has been used more carefully by Rodgers this campaign, but has been in exceptional form when called into action, bagging three goals in his last seven showings.
The Mirror’s Ross Dunbar dubbed Salah “new Franck Ribery,” and while such comparisons may be wide of the mark, it could form an exciting triumvirate should he link up with Suarez and Daniel Sturridge.
Salah relishes receiving the ball out wide, and the prospect of him opening up yet more space for Suarez through the middle is an enticing one.
Liverpool are likely to be busy in the transfer window, but the return of Xabi Alonso appears dead in the water—for the foreseeable future, at least.
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