The Gunners have been crying out for a world-class holding midfielder since Patrick Vieira's departure more than a decade ago.
The news follows recent reports from Sky Germany that the Gunners had expressed an interest in Xhaka, claiming Arsene Wenger had already met with the player's father to discuss a deal.
Arsenal are set to lose three of their more experienced midfielders at the end of the season, with Mathieu Flamini, Mikel Arteta and Tomas Rosicky all coming to the end of their contracts.
Wenger's need for a combative midfielder has been highlighted this season, with a succession of weak displays costing the Gunners since the turn of the year.
Arsenal have struggled to compete with teams who play with a high tempo, aggressively pressing and closing down their star players and the addition of the former Basel general would vastly improve this Arsenal side.
He is especially skilled in breaking up the flow of the opposition's play and is highly accomplished at playing the holding role. He is also technically astute, which is a must for any Arsene Wenger signing.
At 6' 1", the Borussia Mönchengladbach star has an imposing presence - something that Arsenal lack in a midfield full of diminutive playmakers.
Xhaka has already racked up 40 international caps for Switzerland at the tender age of 23.