Hughes feels his authority has been undermined after the club tried to force through the sales of Stephen Ireland to Sunderland and Vedran Corluka to Tottenham.
With owner Thaksin Shinawatra facing corruption charges, the club appears to be on the brink of ruin.
A City source said: "This is not the dream package sold to Mark.
"The club is falling apart and nobody knows how much longer Shinawatra will hang around.
"It feels as though we're in meltdown and all Mark is trying to do is hang on to everything for the sake of the club.
"But if it carries on - and players are sold without his consent - he won't stand any more. He'll just walk."
The insider added: "Some harsh words were exchanged and Mark left everyone in no doubt how he felt."
Shinawatra faces financial ruin and is desperate to recoup cash after £800m of his assets were frozen in Thailand.