Sporting director Damian Vidagany has confirmed talks are under way.
"Joao Palhinha is a very good player who would fit our plans. We are in talks, but there is currently no agreement," Vidagany said, speaking to Bild after Villa's 2-1 pre-season defeat to Bayern in Hong Kong on Friday.
Palhinha spent last season on loan at Tottenham, scoring five goals and adding two assists in 33 Premier League appearances, but Spurs opted against triggering their option to sign him permanently after strengthening their own midfield with Sandro Tonali and Mateus Fernandes.
Bayern Munich have made clear the 31-year-old Portugal international, capped 37 times by his country, has no long-term future at the club and are prepared to let him leave this summer.
Newcastle United have also entered the race, according to Sky, as they look to bolster their midfield following Bruno Guimaraes' departure to Arsenal. The Magpies had been focused on Pierre-Emile Hojbjerg as their primary target, but sources suggest talks over that move have stalled, opening the door for Newcastle to accelerate their interest in Palhinha as an alternative.
Aston Villa, however, are understood to remain ahead in the race, with the club's preference for a loan-to-buy structure - similar to the arrangement that took Palhinha to Tottenham last year - seen as more workable than Bayern's stated desire for an outright permanent sale.
Palhinha was previously linked with a return to Portugal, with Sporting, Porto and Benfica all having shown interest earlier in the summer. Villa have already been busy reshaping their midfield this window, losing Youri Tielemans and bringing in Joao Gomes from Wolves, while Newcastle can point to significant funds raised from the sales of both Sandro Tonali and Guimaraes this summer as they look to reinvest before the transfer window closes.