City were desperate to keep Dunne, but his reluctance to commit his future to the club sparked fears of a repeat of Sylvain Distin's move to Portsmouth last summer, when he left on a free transfer after turning down a new deal.
And City are now resigned to losing their reigning player of the year and raking in the cash towards their summer rebuilding plans.
Dunne's imminent departure only adds to the uncertainty at Eastlands, with manager Sven-Goran Eriksson effectively waiting to be sacked by owner Thaksin Shinawatra, a move that has angered City's fans.
The powerful Irishman has become a hugely popular figure at City since signing in a £3m deal from Everton in October 2000, being voted the fans' player of the year for the last four seasons.
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