Hoffenheim boss Julian Nagelsmann has confirmed his club's interest in Nelson, sating: "We are interested in Nelson - I can say this openly but the obligation is not yet fixed, there are still things to clarify."
Football.london.com said that the two clubs hoped to seal the deal before the European transfer deadline on Friday, though while both clubs were keen in principle, there were still details to be ironed out.
According to the website, Arsenal want the 18-year-old to sign a new contract before they are willing to finalise the deal, and talks aimed at negotiating a new four-year deal were ongoing on Thursday.
It was reported on Thursday - a day after Nelson was absent from Arsenal's training session - that Hoffenheim had agreed a loan fee of £400,000 with the North Londoners, for the season.
Speaking of his admiration for Nelson, Nagelsmann added: "If it works [the deal], we get a player with a lot of speed, who can do a lot of things."