The Switzerland international's current deal at the Emirates Stadium expires in 2024 and there remains an option to extend it by a further year.
Negotiations over a fresh contract began earlier this year following his remarkable run of good form.
But with the Gunners keen to bring in at least one new midfielder in the summer transfer window, sources have told 90min that Xhaka will consider leaving north London this summer and he has backed away from contract talks.
Arsenal are unlikely to keep Xhaka against his will and he is not short of suitors, with several Bundesliga sides interested in the 30-year-old.
Borussia Monchengladbach, who he left in 2016 to join Arsenal, are keen on a reunion, while Xabi Alonso's Bayer Leverkusen are also admirers.
Borussia Dortmund, who are set to lose Jude Bellingham to Real Madrid, are monitoring Xhaka's situation.
Xhaka came close to a Bundesliga return in January 2020 when Hertha Berlin made an offer to Arsenal two months after the midfielder was stripped of the captain's armband. However, he was persuaded to stay and fight for his place by the incoming Mikel Arteta.
Since then, Xhaka has embarked on a redemption arc that could yet end in Premier League glory, establishing himself as a dependable figure in the heart of midfield during the Gunners' title challenge this season.
Arsenal remain a point behind Manchester City in the standings, though the reigning champions also have a game in hand.
Source: 90min.com