The German midfielder still has two years left on his current terms, but City are keen to tie him down to an extension as quickly as possible.
Barcelona have been sniffing around and Spanish sources insist they are considering a big-money bid.
City do not want Gundogan to get near the final 18 months of his present deal before they have began discussions on another.
Even though he has not been an automatic first team choice, Pep Guardiola values him highly and wants to nail down his long-term future quickly.
For his part Gundogan, 27, is happy at the Etihad and there should be no problems agreeing an extension, with terms similar to his current wages of around £100,000 a week.
SunSport revealed in April that the German was keen to enter contract talks after managing 30 Premier League appearances in Man City's title-winning season.
A source close to Gundogan said: "Nobody at the club can see it being a problem. Ilkay loves living in the centre of Manchester and is really content."
He had been the subject of interest from Barcelona seeing him as a possible replacement for former legend Andres Iniesta, who ended his 22-year association with the club to join Vissel Kobe in Japan.
But there is fresh hope for Man City fans, with the signing of a contract extension deemed a formality.
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