City have negotiated a fee of around €4.1 million up front, plus a further €580k in add-ons, with the Liga club.
Personal terms are yet to be agreed with the Argentine defender, though further talks are scheduled for Wednesday as the Premier League side look to recruit cover for the injured Vincent Kompany.
The Belgian limped out of the 4-0 win over Newcastle United in City's first league game of the season, and with Matija Nastasic also sidelined through injury they were forced to field Javi Garcia alongside Joleon Lescott Cardiff City on Sunday, a game they lost 3-2.
Sources close to the deal revealed that City officials were reluctant to pay over €2m for the defender as recently as last week, but the club are now hoping to push through a move for double that price.
Demichelis only joined Atleti on a free transfer from Malaga in July, but has been singled out by Manuel Pellegrini, his former manager at La Rosaleda, to bolster his defensive ranks at the Etihad Stadium.
The pair also worked together at River Plate in 2002-03, before Pellegrini moved to Europe to take charge of Villarreal.
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