The Mirror:
City had been trying to put together a financial package to buy Stam - £7m which would be passed on to United to settle the debt.
But Stam's lawyers are now suing Lazio for breach of contract after they failed to pay him for five months.
He could then be free to join City for nothing - leaving Utd to fight over the debt.
Stam said: "I know there is interest in me in Italy from Inter, AC Milan and Juventus.
"But the biggest interest is in England, particularly Manchester City, and that is a move that would really appeal to me."