Chelsea are set to lose out on the signing of prime target Paulinho, after Inter Milan stepped up their interest in the Brazilian midfielder, while the Blues' pursuit of Isco as good as ended with Malaga confirming the Spanish international's new contract.

Paulinho has been tipped for a move to Europe for quite a while now, and Chelsea were thought to have closely watched the 24-year-old during the Club World Cup, a tournament they lost in the final to Paulinho's current side Corinthians.

Chelsea were still thought to be interested, with Rafa Benitez admitting his team needed a few players in January.

"It is difficult for us because we play a game every three days," Benitez said. "I don't know if we will get anyone in the transfer window. We've had conversations and now it depends on the club.

"We cannot bring back some of the players who are out on loan because we have an agreement that they will carry on for the rest of the season.

"The squad would be fine if we had everyone available. Hopefully the injured players will come back and the African Nations Cup will give us our players back sooner rather than later.

"Then we'll have to manage the squad to deal with this congestion."

However, now a move for Paulinho looks unlikely with Inter confirming their interest in the much-wanted Brazilian.

"(Sporting director Marco) Branca is in Brazil now," Inter president Massimo Moratti told reporters. "We are trying to understand if the conditions are right to sign the player.

"I'm waiting for news, so we will see.

"He is very expensive, without doubt, but we'll see over the next few days whether this is a concrete opportunity for us or not."

Corinthians are demanding a fee of around €15-20 million (£13-17 million, $20-27 million), which Inter are currently unwilling to match.

Chelsea were considering a summer move for Paulinho, but with Inter's arrival they might need to reconsider their plans or risk losing out on the target.

Meanwhile, as expected, Isco signed a new contract extension at Malaga with his buyout clause increasing to €35 million (£30 million, $47 million).

The Blues were thought to be in pole position to land the highly talented playmaker, but now it seems like Isco will remain at Malaga for a while, after signing a three-year extension.

"It's a big step for me and for Malaga," Isco said. "I'm grateful because they brought me to the city.

"I have trust in this team and I think we will continue improving this year, and that's good for me and for the club.

"I'm happy to have renewed. What happens in the future, nobody knows. Nobody has contacted me, these are rumours and run every day. It isn't time to talk about it now."

Malaga sporting director Mario Husillos said the club had received several offers for the 20-year-old, but were ecstatic at securing the player's future.

"The player has always been very clear that the only option was to stay at Malaga," he said.

"There have been offers from other clubs, but the main thing for me is that he continues in Malaga."