Real Madrid president Florentino Perez confirmed Isco had chosen Real over Manchester City and is set to complete his move to the Bernabeu once he undergoes his medical.
Isco is one of the most coveted players in Europe at the moment, with his stock rising even further following some wonderful displays in the UEFA European U-21 Championships, which was won by his team Spain.
The Malaga playmaker has also been linked with City, with former Malaga manager Pellegrini now at the helm at the Etihad.
However, according to Perez, Isco has decided to stay in Spain and show off his skills in the famous all-white jersey of Real.
"There is an agreement with the club (Malaga) and the player," Perez told RNE.
"Isco will be presented next week, all he needs is to overcome the medical examination."
Isco is understood to have agreed a five-year deal with Real with an option of extending it by a further year.
Real have already agreed deals for Casemiro and Dani Carvajal, but Isco will be seen as the first marquee signing of the summer, with new manager Carlo Ancelotti now set to look for a striker.
Gonzalo Higuain has been widely tipped to join Arsenal and Real are thought to be considering moves for Luis Suarez of Liverpool and Edinson Cavani of Napoli.
Isco will also provide more than enough ammunition in the attacking third with Ancelotti promising an attacking style during his reign as Real manager.
"All of the teams that I've coached have played attacking football," he told Real Madrid's official website. "We scored a lot of goals with Milan as well as Juventus, PSG and Chelsea.
"My idea is to play attacking and spectacular football. Real Madrid's history and tradition are to play offensively.
"Fans want us to do well and the team has fantastic players with a lot of quality. So it will not be difficult to play spectacular football."
Ancelotti will also have to try and convince Cristiano Ronaldo that his future lies with Real Madrid. The Portuguese has been heavily linked with a move back to Manchester United, despite Perez continuously insisting Ronaldo will end his career with Real.
