The 28-year-old midfielder is not a certainty in the Real Madrid team and has made just three La Liga appearances in the starting eleven this season.
Real Madrid are prepared to move him on the winter transfer window and he has been heavily linked with a move to the Premier League, where Everton boss Carlo Ancelotti is a big admirer.
Everton could move for Isco if it makes financial sense, but the Toffees now have competition for the player if they do want to land him.
Mikel Arteta wants to add creativity to his Arsenal midfield in January and interest in a deal to sign Isco on loan is at an early stage.
But the potential move is dependent upon several factors and it is far from certain that he will end up at the Emirates next month.
Real Madrid would have to agree to pay a percentage of his wages in order to push the deal through but Arsenal are still likely to struggle financially to put together a deal.
The Gunners would have to move a player on themselves in the winter window in order to make space in their wage bill for Isco.
Arsenal are 15th in the league table and Arteta is desperate to be backed in the market when the window opens next month.
