City were priced out of a deadline day move for Fernando and his team-mate Eliaquim Mangala, but were poised to sign the Brazilian midfielder in the summer as his contract was set to expire in June.
However, reports in Portugal over the weekend claimed the 26-year-old has opted to extend his stay at Porto until 2017, handing City a blow.
Manuel Pellegrini is desperate to bolster his midfield options - City suffered when the Chilean was forced to deploy Martin Demichelis in the middle of the park during their 1-0 defeat to Chelsea - and sources in France claim he will now pursue Matuidi.
The 26-year-old, who has been capped 19 times, is out of contract at Paris Saint-Germain at the end of the season and is not expected to renew terms.
And City will try to tempt him to the Etihad with a bumper four-year deal worth £5m a season in the hope of fending off interest from the likes of Chelsea and Barcelona.