The Daily Star says City wanted Xabi to replace Mikel Arteta on manager Pep Guardiola's staff after his departure four years ago for Arsenal.
The Bayer Leverkusen coach was in charge of Real Sociedad at the time.
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And while tempted, Xabi chose to stay with La Real out of loyalty to the club.
The Spaniard would leave months later for Bayer in the Bundesliga