The midfielder is one of the prime targets for manager Mikel Arteta this summer.
However, Radio Marca states their offer for the 28-year-old is not seen as sufficient.
La Real know that Merino is out of contract in a year’s time, but still want a hefty fee.
They may be considering keeping him for his last year and risk losing him on a free transfer.
Arsenal are said to be continuing negotiations with the hopes of reaching an agreement.