Palacios has been linked with Los Blancos for some time and is widely expected to move to the Spanish capital at some point. El Pais (h/t Sport Witness' Lucas Sposito) interviewed several scouts and River Plate for a recent report.
A scout from City confirmed the club's interest and explained why Palacios is not likely to end up in England: "It's hard to pay 20 million for such a young player. We have good footballers in their position that would stall their growth."
The 20-year-old's agent previously told AS' Alex de Llano that Real will open talks with River Plate to complete the signing, adding they've pushed harder than any other club.
Palacios has been a driving force behind River Plate's run to the Copa Libertadores final and will be in action on Sunday, when they face archrivals Boca Juniors at Real's Santiago Bernabeu Stadium.
Once that match is over, negotiations are expected to speed up, and the fact River Plate are already in Madrid should make things a little easier.
Barcelona were strongly linked with the midfielder in the past, and Sport reported they scouted him earlier this season.
Here is a look at Palacios in action:
The recent emergence of Marcos Llorente and Federico Valverde's strong showing in the Copa del Rey have lessened Real's need for midfield depth, so Los Blancos should be in no rush to bring Palacios into the fold in January.
A straight loan back to River Plate could even be an option, allowing the talented prospect more regular playing time in Argentina before he makes the move to Europe.