According to Fred Nathan in the Sun, Bayern Munich left-back Alaba is being eyed by Guardiola for a potential £40 million deal due to his versatility and the fact that Gael Clichy and Aleksandar Kolarov are drawing to the end of their respective careers.
Having lost their first appeal, Los Blancos are now banned from signing players for the next two windows and so could be helpless to stop City snapping Alaba up if they can convince Bayern to sell.
Per Bleacher Report's Sam Tighe, Real needed to add a new left-back in the summer, as they had little cover or competition for Marcelo:
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Alaba would have been the perfect candidate, as he is also a superb defensive midfielder and could have provided manager Zinedine Zidane with further options to Casemiro in the deep-lying role.
They missed out on Alaba, though, and then failed to add any other genuine cover at left-back.
With their transfer ban now imposed, Zidane will have to work with what he has as Real look to challenge for the Liga title and defend their UEFA Champions League in 2016-17.
There is little they can do about City's interest in Alaba except hope that Bayern are as unreceptive to the idea of letting him move to Manchester as they were Madrid.
Meanwhile, another of Real's key reported summer targets, Borussia Dortmund striker Pierre-Emerick Aubameyang, is also now a target of City's.
However, per Bild (via ESPN FC's Stephan Uersfeld), BVB sporting director Michael Zorc dismissed the links with the Sky Blues as "bulls--t," while the German newspaper reported Aubameyang's valuation at €80 million (£71.2 million).
The Gabon international has netted 32 goals in his last 38 Bundesliga appearances since the start of 2015-16 and has been nominated for the 2016 Ballon d'Or, per France Football:
France Football @francefootball
Nominee for the Ballon d'Or France Football : PIERRE-EMERICK AUBAMEYANG ! #ballondor https://t.co/rAh51S2G9k2016-10-24 06:01:47
The fact that Zorc has so comprehensively shut down the striker's links to City can only be a good thing for Real if they, as is likely, retain ambitions to sign him in the future.