The Red Devils are believed to have had bids knocked back for Sancho during the summer transfer window before turning focus to teenage winger Diallo.
Atalanta BC accepted United’s £37m offer – £18m of that in various add-ons – and the youngster officially arrived at Old Trafford last month.
Diallo has yet to feature for the first team, but he scored twice against Liverpool on his debut for the Under-23s side last weekend.
That led to calls for Ole Gunnar Solskjaer to fast-track the 18-year-old into the senior squad, a decision which the Norwegian is still weighing up.
According to The Express, Diallo’s impact behind the scenes may be enough to end United’s interest in Sancho once and for all.
Sancho has had an underwhelming campaign with Dortmund this time around, finding the net just three times in 17 Bundesliga appearances, compared to 17 in 32 outings last term.