The Catalan club have been exploring the conditions of a potential move for the Argentina international amid growing belief that Alvarez would be open to joining them if a deal ever became possible.
However, the race took an unexpected turn when Real Madrid suddenly entered the picture.
Sources indicate Florentino Perez turned to Alvarez only after Bayern Munich completely ruled out any possibility of selling Michael Olise, who had been Madrid's preferred attacking target and one of the marquee names discussed internally ahead of Perez's re-election.
With the door firmly closed by Bayern, Madrid switched their attention to Alvarez and tested Atletico's resolve with a €150m offer. The proposal was immediately rejected.
Atletico have no intention of selling one of their star players to their city rivals and remain determined to keep Alvarez at the club. Their stance mirrors Bayern's position on Olise, with neither club willing to entertain offers from Real Madrid for one of their most important attacking players.
There are differing interpretations of Madrid's approach. Some sources believe the bid was a genuine attempt to land Alvarez following the failure to make progress on Olise. Others suggest the move was always unlikely to succeed and instead served as a statement of intent that Madrid are prepared to spend heavily under Jose Mourinho.
Another theory emerging around the market is that Perez's move could have been designed, at least in part, to complicate Barcelona's pursuit by introducing fresh uncertainty into the situation.
For now, Atletico's position remains unchanged. The club do not want Alvarez to leave under any circumstances this summer.
But Barcelona continue to monitor the situation closely and still believe the player would be interested in a move to Camp Nou if the opportunity arises.
Elsewhere, Arsenal have shown interest in Alvarez but are increasingly focusing on alternative targets amid concerns that a deal is moving beyond their reach.
Paris Saint-Germain also remain admirers of the forward and are keeping an eye on developments.
Real Madrid are now expected to move on to other options after Atletico's rejection.
Sources say one name that could rise on their shortlist is Paris Saint-Germain's Khvicha Kvaratskhelia, who is highly regarded internally and behind only Olise and Alvarez among their preferred forward targets.
