Pasalic took time to get going at the San Siro last season and only made his first Serie A appearance in the Rossoneri's eleventh league game of the campaign.
However, he soon hit his stride and by the end of the season was established as a key man at AC Milan.
The Rossoneri want to keep the 22-year-old into next term and look to be in pole position to do so, with Chelsea likely to be happy for him to benefit from continued first team football.
AC Milan do not have things all their own way though as, according to Italian outlet Tutto Mercato, Lazio and Valencia have joined the race.
The pair were both impressed with Pasalic's assured displays in midfield for the Rossoneri last term and want to add him to the ranks.
As the Croatian is out of contract at Chelsea next summer, the Blues may want him to pen a fresh deal before another loan is sanctioned.
Alternatively, Chelsea could look to cash in.
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