The 19-year-old forward scored his first goal for Liverpool on Friday evening, netting in the FA Cup third round draw with Exeter.
He currently holds Liverpool’s record as the youngest player ever to appear in a competitive match for the club, playing in a League Cup clash at just 16 years and six days old.
Regarded as one of the brightest talents in English football, Sinclair has also spent a loan spell with Wigan, playing just one game for them last season.
Despite his reputation as an exciting teenage talent, Liverpool have yet to tie Sinclair down to a new contract, with his current deal expiring at the end of this campaign.
With the Reds not rushing to resolve this contract situation, the Mail report indicates that both Watford and Liverpool are hoping to capitalise and sign Sinclair on a permanent deal.
Espanyol of Spain and Groningen of the Netherlands are also linked with the young forward, but Watford and City are said to be leading the race for his signature.
There are no indications that Liverpool are fighting to keep Sinclair at Anfield, or if they are resigned to letting him leave. Should the youngster leave on a free transfer this summer, a compensation fee will have to be agreed with the Reds for the transfer of his services.