Balotelli, who scored a hat-trick in a 4-0 win over Aston Villa on Tuesday, has repeatedly been linked with a possible move to Milan and is reported to be homesick and unhappy in England following his transfer from Inter last summer.
The Italy international is a boyhood Rossoneri fan and has made no secret of his admiration for the side, even during his time with City rivals Inter when he was filmed wearing a Milan shirt.
While Allegri would be keen to coach Balotelli, he admits he would struggle to find a place for him at present, given the club have recently added Antonio Cassano to a list of forwards that includes Alexandre Pato, Robinho and Zlatan Ibrahimovic.
"I would willingly coach Balotelli," Allegri said. "But it would be difficult given that we have so many champions in our team."
City manager Roberto Mancini remains determined to transform the unpredictable Balotelli into one of the Premier League's finest players at Eastlands, despite suggestions that the forward is struggling to adapt to life in England.
Team-mate Nigel De Jong, who himself has had a difficult period in his career following his leg-breaking tackle on Newcastle's Hatem Ben Arfa in October, says Balotelli must focus on producing on the pitch, rather than courting controversy.
"Everything is a mental thing and about character," De Jong said. "What doesn't break you can't kill you and that's what I have tried to tell Mario. Just try to do your best and let other people talk about you.
"I'm still the same Nigel de Jong that I was. It's not about changing your game, it's about getting your head down on the pitch. It's about talking with your feet and less with your mouth. That's what I had to do and that's my mentality. That's also why I try to bring it to the guys in the dressing room, like Mario.
"He is still a young lad. He is coming back from a difficult couple of weeks, but he is still here and the team is there to help him. You can only become a great player by working hard every day, though, and believing in yourself, with the backing of your team-mates. We will provide that, but he has to do the rest himself."
Meanwhile, City striker Roque Santa Cruz has rejected the chance to join Lazio on loan, according to the Italian club. Santa Cruz is expected to leave City in January, with the club closing in on Edin Dzeko, but wants a permanent move away from Eastlands.
"We take into account Santa Cruz's reaction and his desire to make any transfer permanent," Lazio president Claudio Lotito said. "We are aware of this and consider it a wise decision for him. It's no coincidence that Lazio seek a strong rapport with their players and therefore understand his questions and ambitions."
City remain in talks to sign Dzeko from Wolfsburg, but assistant manager Brian Kidd was unwilling to discuss the deal in a press conference on Thursday.
"At the moment it is just speculation," Kidd said. "The window hasn't opened. It's the usual story isn't it, 'No buy, no sell, no tales to tell'. At the moment it's just speculation with a lot of players being thrown in the pot.
"There is only one man who decides [whether Dzeko is a player of interest], and that's the boss [Roberto Mancini]. I don't think it's right to speak about other players at other clubs."
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